Boom of Banking in Pakistan

Boom of Banking Industry in Pakistan
Individual Research Paper (IRP)
8th Mid Career Management Course

By
Saeed Ahmed Sheikh (Information Group)
The paper submitted to the Faculty of the National Institute of Management, Karachi, is in
partial fulfillment of the requirements of the 8th Mid Career Management Course. The
contents of the paper are the end product of my own efforts & research and reflect my own
personal view and are not necessarily endorsed by the National Institute of Management.
Signature:
Date:
Paper supervised by:

Ms. Zarrin Qureshi
Lt. Col. ® Ijaz Ahmed
ii
PREFACE
National Institute of Management, Karachi, like its other counterparts, has developed a tradition of
entrusting research assignments to the participants of different courses. The basic purpose of
conducting & supervising these research assignments is, of course, to accustom them of examining
& analyzing different problems and issues at length. Since, as part of the requirement of Mid
Career Management Course (MCMC), I was assigned to write an Individual Research Paper (IRP)
on ‘Boom of Banking Industry in Pakistan’, which initially appeared to me an uphill task. With no
background knowledge of banking and with a pinching sense of paucity of time hovering over my
mind, my position was similar to that of a young bird who had a vast horizon ahead and no
experience to fly.
But first of all I thank Almighty Allah Who gave me the courage, health, energy and will to accept
this challenge & work on it with such a zeal & dedication that Alhamdulillah I have no remorse for
not doing justice with my research assignment. What could be of more satisfaction to me than the
belief that His help stood by me till the last page of this research paper was completed.
Motivation, encouragement, guidance and overall support are the key elements required from the
supervisor (s) to write and complete a research paper of a good standard & quality, within
deadlines. It is a matter of utmost pleasure for me to extend my gratitude to my supervisors Ms.
Zarrin Qureshi and Lt. Col. ® Ijaz Ahmed whose support was with me during this hectic exercise.
Further, I am also in praise for the Director General, Mr. Tauqeer Ahmed, the Chief Instructor Ms.
Nighat Mehroz & rest of the faculty members of NIM Karachi for sparing/allocating research hours
on daily basis during the course-schedule of 8th MCMC, making it easier for the participants to
carry out their research along with other activities.
I would also like to thank my younger brother Mr. Naveed Ahmed Sheikh whose valuable
comments, suggestions & proof-reading of the original draft of the paper made colossal
contribution in improving my dissertation.
SAEED AHMED SHEIKH

8th MCMC
NIM, Karachi
E-mail: fakeerou@yahoo.com
iii
EXECUTIVE SUMMARY
A growing and dynamic banking sector is essential for the economic growth of any
country. The growth in the banking sector and the real economy mutually reinforce each
other. It is a proven fact that an inefficient banking sector drags the economy. The financial
system of Pakistan is highly bank-centered. This phenomenon in itself further intensifies
the need of a dynamic, profitable, respectable and strong banking system.
The aim of this study was to examine and evaluate the performance of the banking
industry in Pakistan with a view to gauge i) whether boom in baking industry is a reality or
a mere perception; ii) is this boom (if it is a reality) making any contribution towards the
growth of the economy, and iii) does the banking sector embodies in itself a potential to
further boost the economy.
The study, with support of analytical & quantitative research, unfolds the dynamism,
robustness, profitability and strength of Pakistan’s banking industry in its different phases
of history (including the era of liberalization/privatization), proving that boom is a reality;
it is not a mere perception or deception. The boom in Islamic Banking, since its re-launch
in Pakistan in 2002, also finds a special portion in this study. Banks’ contribution towards
the economic development of Pakistan has also been discussed with special reference to
their enhanced lending in Microfinance, SME, Housing and Infrastructure sectors.
The achievements made by the banks in Pakistan are impressive; however, many
challenges (including the need for greater financial access, availability of financial safety
nets, deepened financial intermediation etc.) still lie ahead. While discussing these
challenges in brief, the study also touches upon the need to focus more on Microfinance &
SME sectors. This paper also maps out a strategy for developing an efficient ‘consumer
protection system’ in order to bring transparency in interest rates & other issues of
common-man’s concern.
The gist of the study as to how our banking system can be made more responsive towards
our economic growth reveals itself in the portion of suggestions/recommendations.
iv
GLOSSARY
AB Allied Bank
ADB Asian Development Bank
BSC Banking Services Corporation
CAR Capital Adequacy Ratio
CBs Commercial banks
CFI Commercial financial institution
CLA Corporate Law Authority
CY Calendar Year
DFI Development finance institution
EMO Expanding Microfinance Outreach strategy, State Bank of Pakistan
ESOP Employees Stock Ownership Plan
EMG Employees Management Group
FMFB First Micro Finance Bank Ltd.
FY Financial Year
GoP Government of Pakistan
IB Islamic Bank
IBIs Islamic Banking Institutions
IDB Islamic Banking Department, State Bank of Pakistan
IFI Islamic Finance Institutions
IMFB Islamic Microfinance Bank
MCR Minimum Capital Requirements
MCB Muslim Commercial Bank
MF Microfinance
MFB Microfinance bank
MFI Microfinance institution
MFP Microfinance provider
NBP National Bank of Pakistan
NIBAF National Institute of Banking and Finance
NCBs Nationalized Commercial Banks
NPL Nonperforming loan
NRSP National Rural Support Programme, Pakistan
NSC Non-shareholding companies
PBC Pakistan Banking Council
PBSRPP Pakistan Banking Sector Restructuring and Privatization Project
PKR Pakistani rupee
PMN Pakistan Microfinance Network
PPAF Pakistan Poverty Alleviation Fund
PRSP Punjab Rural Support Programme
ROA Return on assets
ROE Return on equity
RSP Rural Support Programme
SBP State Bank of Pakistan
SCBPL Standard Chartered Bank Pakistan Limited
SECP Securities and Exchange Commission of Pakistan
SME Small and medium enterprise
SMEDA Small and Medium Enterprise Authority, Pakistan
ZTBL Zarai Taraqiati Bank Limited
CONTENTS v
Preface ii
Executive Summary iii
Glossary iv
CHAPTER 1 (1-3)
INTRODUCTION 1
1.1 Introduction to the study 1
1.2 Statement of the Problem 1
1.3 Limitations of the study 2
1.4 Methodology 2
1.5 Study Layout 2
1.6 Review of Literature 3
CHAPTER 2 (4-7)
BANKING IN PAKISTAN - A BACKGROUND HISTORY 4
2.1 Formative Phase (1947-1948) 4
2.2 Phase of Emergence (1949-1958) 4
2.3 Phase of Growth (1959-1970) 5
2.4 Phase of Strains (1971) 5
2.5 Phase of Nationalization (1972-1977) 5
2.6 Phase of Healing Reforms (1978-1996) 6
2.7 Phase of Structural Reforms (1997-2002) 7
CHAPTER 3 (8-12)
BOOM OF BANKING IN RECENT YEARS 8
3.1 A Real Boom by All Indicators 8
3.2 Base of Boom 8
3.3 Analysis of Boom 9
3.3.1 Profitability 9
3.3.2 Solvency 10
3.3.3 Balance Sheet Analysis 11
CHAPTER 4 (13-15)
ISLAMIC BANKING-A NEW STORY OF SUCCESS 13
4.1 Introduction 13
4.2 Brief History of Islamic Banking in Pakistan 13
4.3 Islamic Banking in Pakistan- A Performance Review 13
4.3.1 Profitability 13
4.3.2 Solvency 14
4.3.3 Balance Sheet Analysis 14
CHAPTER 5 (16-21)
vi
ROLE OF BANKS IN PAKISTAN’S ECONOMIC GROWTH 16
5.1 Resume 16
5.2 Financial Stability 16
5.3 Domestic Macro-developments 17
5.4 FDI 18
5.5 Foreign Exchange Reserves 18
5.6 Development Finance 19
5.6.1 Microfinance & SME 19
5.6.2 Trade 20
5.6.3 Agriculture 20
5.6.4 Housing Finance 21
5.6.5 Infrastructure Sector 21
CHAPTER 6 (22-26)
RECOMMENDATIONS: HOW BANKS CAN FURTHER HELP OUR
ECONOMY TO GROW 22
6.1 Logic 22
6.2 Extending the Base of Banking Services 22
6.3 Microfinance Sector 22
6.4 SME 23
6.5 Islamic Banking 23
6.6 Agriculture Lending 24
6.7 Housing Sector 24
6.8 Government-owned Banks 24
6.9 Interest Rates 25
6.10 New Banking Act 25
CONCLUSION 26
BIBLIOGRAPHY (27-28)
APPENDICES
I Group-wise Composition of Banks 29
II Financial Soundness Indicators 30
III Financial Soundness Indicators 31
IV Composition of Banks’ Total Assets & Deposits 32
V Bank-wise Major Statistics 33
VI Group-wise Balance Sheet & Income Statement of Banks 34
VII Group-wise Balance Sheet & Income Statement of Islamic Banks 35
Chapter 01 1
INTRODUCTION
1.1 INTRODUCTION TO THE STUDY

Banking industry in Pakistan has shown an unprecedented growth in recent years. Judged
by any indicator, the dynamism and robustness of banking sector is impressive and stands
out particularly relative to its state in early 1990s when the financial system was dominated
by public sector dominated banks. The growth in banking system has been driven by rise
in deposits and advances to trillions1. This particular growth has compelled different
industrial economists & analysts to name this growth as ‘boom’. The entry of Islamic
Banks into this arena has further made the case of banking in Pakistan as more grappling as
this particular banking industry is emerging as a strong competitor to decades-old
conventional banking.
Economists, while studying banking as a component of a country’s financial system, take
its growth or otherwise as a matter of deep deliberation. In an economy like that of
Pakistan, where financial system is highly bank-centered, banking system demands special
focus & attention from both the researchers & analysts.
The study of boom in banking industry of Pakistan therefore in fact refers to a healthy
working of financial system. But, as Pareto efficiency may demand, boom in banking
industry should, as a matter of fact, contribute to a boom in overall economy as in general
practice the growth in the banking sector and the real economy mutually reinforce each other.
1.2 STATEMENT OF THE PROBLEM
The aim of present study is to examine & analyze firstly, the nature & genesis of the
present boom in banking and secondly, correlating it with overall economic development
of the country. Pakistan’s economy, after coming out of the aftermaths of global recession,
is again returning towards stability. This particular situation also necessitates a study of
banking system vis-a-vis economic development, focusing upon the point that how a boom
in banking industry can reinforce a boom in overall economic development. The
1
Deposit base of Pakistan’s banking industry rose to Rs 4.48 trillion and gross advances to Rs 3.11 trillion by
September 2009. Supported by the growing financial intermediation process, banks’ aggregate profitability
rose from Rs 63.3 billion in 2005 to Rs 73.3 billion by 2007 and Rs 71.1 till September 2009. (Source:
Quarterly Performance Review, SBP, September 2009)
hypothesis for the study is that the recent boom in banking industry of Pakistan has
2
positively impacted the overall economic growth.
1.3 THE LIMITATION OF THIS STUDY
The study, in its quantitative analysis, is all based on State Bank of Pakistan’s evaluation
of banks’ performance that is made under traditional frame work of financial analysis. It
excludes any analysis of the banking sector under structure, conduct and performance
paradigm of industrial organization2 (especially when like other countries, we also name
our banking system as ‘banking industry’) due to the reason that no such data about
Pakistani banks is available to assess their true potential of growth on the internationally
acceptable standard (which has been referred above).
1.4 METHODOLOGY:
The method adopted in this study will be chronological in Chapter 2, while in rest of the
Chapters it would be both descriptive & analytical. The primary source of data in present
study includes different reports of SBP (Development Finance Quarterly Reviews,
Financial Stability Reviews, Quarterly Performance Reviews of Banking System and
Yearly Financial Reviews) and Economic Survey(s) of Pakistan. While the secondary data
comes largely from different policy documents of State Bank of Pakistan & Ministry of
Finance. The relevant literature including books & journals’ articles also come under
perusal for the purpose.
1.5 STUDY LAYOUT:
The study has been divided into six chapters. Chapter 1 contains an overview of the
purpose, importance, need and benefits of this particular research, followed by brief notes
on methodology, study layout & book review. Chapter 2 of the study presents a brief
historical background of the banking system of Pakistan. Chapter 3 highlights the post-
liberalization/privatization scenario of banking industry vis-à-vis its overall performance.
Chapter 4 delves briefly into the past, present & future outlooks of Islamic banking with a
view to assess its growth. Chapter 5 of the study highlights the role of banks vis-à-vis
economic development. Chapter 6 gives suggestions that how banks can further help our
2
Arby, Muhammad Farooq, in his research work under the title ‘Structure and Performance of Commercial
Banks in Pakistan’ (2003) argues that the study of commercial banks in Pakistan under structure, conduct
and performance paradigm of industrial organization is not only non-existent but also extremely difficult
due to non-availability of information, and second even structure and performance have been so far evaluated
on the basis of limited parameters, not acceptable worldwide.
economy to grow. The study ends up with a conclusion, followed by bibliography and few
3
important appendices.
1.6 REVIEW OF LITERATURE
Existing literature on both conventional & Islamic banking industry of Pakistan unleashes various
studies. ‘Performance of Islamic Banking and Conventional Banking in Pakistan: A Comparative
Study’ (2008) by Mr. Shahzad Moin highlights the financial performance of Islamic banking in
Pakistan in comparison with conventional banking. ‘Financial Sectors Reforms & Efficiency of
Banking in Pakistan’ (2007) by Mr. Qayyum Ahmed and ‘Financial Sectors Reforms &
Soundness of Banks Operating in Pakistan’ (2007) by Azam Ali and Ishaque Ahmed Ansari,
largely discuss financial sector reforms with their impact on the soundness of banks. ‘Trade,
Financial & Growth Nexus in Pakistan’ (2006) by Mr. Muhammad Irshad Khan and Mr. Abdul
Qayyum empirically investigates the impact of trade and financial liberalization on economic
growth in Pakistan using annual observations over the period 1961-2005. ‘Financial Liberalization
and Macroeconomic Performance: Empirical Evidence from Pakistan’ (2006) by Dr. Imran Sharif
Chaudhry makes an empirical study of banks’ liberalization vis-à-vis macroeconomic stability.
‘Structure & Performance of Commercial Banks in Pakistan’ (2003) by M. Farooq Arby, attempts
to analyze the structure and performance of commercial banks in Pakistan under the framework of
industrial organization. ‘The Effect of Privatization and Liberalization on Banking Sector
Performance in Pakistan’ (2006) by Umer Khalid & ‘Post-liberalization Efficiency and
Productivity of the Banking Sector in Pakistan’ by Syed Fawad Ali Rizvi, both discuss the effects
of privatization/liberalization on banks’ performance. There are also some important books related
to the topic: ‘Islamic Finance, Opportunity and Challenges’ (2008) by Dr. Shamshad Akhter and
‘Defining a Prosperous Financial Future’ (2005) by Dr. Ishrat Hussain, highlight the potential &
strength of Pakistan’s banking system. ‘Money and Banking in Pakistan’ (1977) by S.A. Meenai,
discusses money & banking in Pakistan from 1947-1977. Some reports from international
organizations like ‘Pakistan Economic Update, 2009’ by World Bank and ‘Asian Development
Outlook Update: Broadening Openness for a Resilient Asia’ (2009) by Asian Development Bank
and important journals published by State Bank of Pakistan like ‘Pakistan’s Islamic Banking
Sector Review’ (2007) & ‘Strategic Plan for Islamic Banking Industry of Pakistan’ (2008) that
highlight different weaknesses & strengths of Pakistan’s banking system also include the review of
literature for this particular study.
Chapter 02 4
BANKING IN PAKISTAN - A BACKGROUND HISTORY
2.1 FORMATIVE PHASE (1947-1948)

Banking system, that Pakistan inherited, started from a virtual scratch. The announcement
of Partition Plan of 3rd June 1947 brought a hasty closure of Indian banks from the areas
which were to constitute Pakistan and by June 30, 1948 the number of scheduled bank
offices in Pakistan had declined from 487 to 195.3 Pakistan’s banking system by that time
consisted of 19 non-Indian banks (with their small branches) and two of its own banks:
Habib Bank, which had transferred its office from Bombay to Karachi in 1947 & the
Australasia Bank, which had already been functioning in Pakistan’s territories prior to
1947. During the period, a number of subversive activities by the Imperial Bank of India4
forced Pakistan to set up its own Central Bank as early as possible. So under SBP Order of
May 12, 1948, State Bank was declared open on 1st July 1948 by the Father of the Nation. 5
It was also in this period that MCB shifted its head-office in 1948 from Calcutta to Dhaka.
2.2 PHASE OF EMERGANCE (1949-1958)
During 1949-1958 banking system emerged to its best. NBP was set up under an
Ordinance in November 1949 with a view to work an agent of SBP6. Habib Bank also
continued expanding its organization. During the period, where the number of banks rose
from 195 to 307 (by the end of June 1958), the role of banks in mobilizing domestic
savings and meeting credit requirements also grew manifold. “From Rs. 88.05 crores in
July 1948 deposits had risen to Rs. 238.94 crores. Total bank credit rose from Rs. 19.78
crores to Rs. 122.55 crores over the period”.7
3
Meenai, S.A., ‘Money and Banking in Pakistan’, Karachi 1977, p.2
4
Imperial Bank of India which was working as the agent of Reserve Bank of India, did all to disturb
Pakistan’s banking system. a) It closed down most of its offices. b) It declined to purchase token amounts of
Government of Pakistan securities on the plea that they were not marketable. c) It refused to assist
Government of Pakistan with an advance against ad-hoc securities to enable the State to make its essential
disbursements such as salaries, etc. d) Above-all, it withheld Pakistan’s share of Rs. 75 crores in cash balance
held by the undivided Indian Government at the time of partition.
5
6
Ibid, p.5
7
Ibid, p.11
2.3 PHASE OF GROWTH (1959-1970)

5
The period 1959-1970, that also included General Ayub Khan’s ‘Decade of Progress’,
brought a remarkable growth in banking. In 1959, United Bank was established. 8 During
1960-65, SBP opened six new offices9. Several new banks were added to the list of
scheduled banks; two principal additions were the Commerce Bank and the Standard Bank.
The total number of scheduled bank offices rose from 430 at the end of June 1960 to 3133
at the close of 1970. During the period banks’ credit rose from Rs. 145.83 crores to Rs.
949.20 crores at the end of June 1970. Banks’ deposits also grew from Rs. 294.31 crores to
Rs.1314.69 crores.10
2.4 PHASE OF STRAINS (1971)
In the wake of political disturbances during 1971-72, Pakistan’s banking system witnessed
serious shocks & strains. There was heavy withdrawal of deposits from banks.
Government started a demonetization operation in June 1971 that also brought certain
stresses for the monetary system of the country.
2.5 PHASE OF NATIONALIZATION (1972-1977)
After the separation of East Pakistan, the new government introduced far-reaching banking
reforms in May 1972 by which SBP was vested with wider powers.11 The banking reforms
of 1972 were still immature that Nationalization of Banks Act, 1974 came into force. The
SBP and all the CBs were brought under the ownership of Government with effect from 1st
January 1974. “The shareholders were compensated in the form of Federal Government
bonds redeemable at par at any time within a period of 15 years” 12. After nationalization,
Pakistan’s banking system registered further growth. The number of bank offices rose to
5187 in 1977; the expansion was particularly rapid in rural areas of the country.
Government’s aim to “nationalize banks in 1974 was to make credit availability to highly
8
United Bank started with an initial authorized capital of Rs. 2.0 crores and a paid up capital of Rs. 1.0 crore,
as quoted by Meenai, S.A., ‘Money and Banking in Pakistan’, Karachi 1977, p.11
9
These officers were opened in Chittagong, Peshawar, Quetta, Khulna, Lyallpur and Rawalpindi.
10
11
SBP could “remove directors or managerial personnel, if necessary, and supercede the board of directors of
a banking company and appoint administrators during the period of such repression. It was also empowered
to nominate directors on the board of every bank”. Meenai, S.A., ‘Money and Banking in Pakistan’, Karachi
1977, p.18
12
priority sectors of the economy”13. This step of nationalization completely wiped out the
6
private sector from the banking business.
2.6 PHASE OF HEALING REFORMS (1978-1996)
Nationalization affected the performance and efficiency of the banks in the long run.
During 1982-1987 (pre-reform period) ‘the earning assets to total assets ratio declined
from 76.3 % in 1982 to 73.7 % in 1987. Throughout the period, return on assets remained
around 1 %, which reflected the inefficiency of the banking industry. Return on equity
remained below 25 % while earning to assets ratio found below 12 % during the period.” 14
Again the analysis of the period (1988-1990) made Government to revise nationalization
policy. Consequently the Banks (Nationalization) Act, 1974 was amended in 1991. As first
step twenty three banks were allowed to work (10 banks belonged to domestic sector and
rests were international/foreign banks). Please see Table underneath
TABLE: 1 PRIVATE AND FOREIGN SCHEDULED BANKS
ESTABLISHED IN 1991
1 Metropolitan Bank Limited, 13 Bank AI-Habib Limited

2 Faysal Bank Limited 14 Bank of Punjab
3 Mehran Bank Limited 15 Union Bank Limited
4 Askari Commercial Bank Limited 16 Prime Commercial Bank Limited
5 Republic Bank Limited. 17 Capital Bank Limited
6 Schon Bank Limited 18 Habib Credit & Exchange Bank

Limited
7 Prudential Commercial 19 Platinum Commercial Bank
Bank Limited Limited
8 Bank of Khyber 20 Trust Bank Limited
9 Soneri Bank Limited 21 Bank AI-Falah Limited
10 Indus Bank Limited 22 Oman International Bank
11 Bolan Bank Limited 23 Gulf Commercial Bank Limited
12 Bank of Ceylon 24
Source: FSA 1990-2000
The process of denationalization/privatization of Nationalized Commercial Banks (NCBs)

was also started with the privatization of MCB and ABL15. The SBP in its enhanced role as
13
Chaudhry, Imran Sharif: ‘Financial Liberalization and Macroeconomic Performance: Empirical Evidence
from Pakistan’, London (2006).
14
Azam Ali & Ansari: ‘Financial Sectors Reforms & Soundness of Banks Operating in Pakistan’, (2007).
15
In 1991, 26% shares of MCB and ABL were offered to the private sector, followed by floating of 49%
more shares of MCB during 1993. Consequently the management and control of MCB was transferred to the
buyer. Under the Employees Stock Ownership Plan (ESOP) 25 % shares of Allied Bank Limited (ABL) were
sold to private sector in August 1993. As a result the management and control of the bank was handed over to
Employee Management Group (EMG).
regulator in 1993, advised banks to set quarterly recovery targets, submit their progress
7
reports and formulate strategies to improve future recovery.
2.7 PHASE OF STRUCTURAL REFORMS (1997 - 2002)
In 1997, SBP revised disclosure standards and banks were directed to submit their annual
accounts on new formats of CAMELS & CAELS16 as per with international accounting
practices. Government also amended two important banking laws17 & repealed two
others18. Moreover, the Pakistan Banking Council was abolished and the SBP was given
sole responsibility to regulate banking sector. In its help to Government, WB approved a
credit for the Pakistan Banking Sector Restructuring and Privatization Project (PBSRPP)19
that included privatization of NCBs, corporate governance, capital strengthening,
improving asset quality, etc. SBP was also divided into three organizations 20 Securities
and Exchange Commission of Pakistan (SECP) was also created in 2001 that replaced
Corporate Law Authority (CLA), creating two regulators of financial sector such as the
SBP and the SECP itself.21
Chapter 03
16
CAMELS stands for Capital adequacy, Asset quality, Management quality, Earnings, Liquidity and
Sensitivity to market risk systems and controls and CAELS for Capital adequacy, Asset quality, Earnings,
Liquidity and Sensitivity.
17
i.e., Banking Companies Ordinance (1962) and the State Bank of Pakistan Act (1956)
18
The Banking Tribunal Ordinance (1984) and Banking Companies (Recovery of Loans) Ordinance (1997)
were repealed through promulgation of Banking Companies (Recovery of Loans and Advances, Credit and
Finance) Ordinance (1997).
19
“The main focus of PBSRPP was to improve the efficiency of state owned banks by reducing the cost
structure, complete privatization of banks, liberalizing bank branching policy, reduction in taxes, integration
of national savings scheme to the financial markets, discontinuance of the mandatory placement of foreign
currency deposits by the commercial banks, and strengthening the central bank to play effective role as a
regulator of banking sector”. (Qayyum, Ahmed, ‘Financial Sectors Reforms & Efficiency of Banking in
Pakistan, 2006)
20
This division was: 1) the SBP as a Central Bank, 2) SBP-Banking Services Corporation (SBP-BSC), and 3)
National Institute of Banking and Finance (NIBAF).
21
Qayyum, Ahmed, ‘Financial Sectors Reforms & Efficiency of Banking in Pakistan, (2006)
BOOM OF BANKING INDUSTRY IN RECENT YEARS 8
3.1 A REAL BOOM BY ALL INDICATORS

Judged by any indicator, the growth of Pakistan’s banking sector in recent period is
impressive. With a rise in deposits to Rs. 4.48 trillion, advances to Rs. 3.11 trillion &
accumulated assets over to Rs. 3.11 trillion by the end of September 2009 (please see
Annex-IV) banks are on their route to success. Recapitalization and prudent lending,
supported by strong regulatory and supervisory framework, lowered net Non-Performing
Loans (NPLs)22 to historical lows in CY 2008. In line with international trends, SBP
introduced Basel II23 under which banks have attained higher capital adequacy levels --well
above the minimum level for the sector as a whole. Despite economic shock and stress in
stock market in CY 08, the banking system has been showing an increase in profitability
since FY 09.
3.2 BASE OF BOOM
This boom in banking system is not accidental as it has a strong base. Firstly, it emerges
from well coordinated restructuring process by GoP with recapitalization through (i) equity
injection of Rs. 46 billion in some of the public sector banks and write offs equivalent to
Rs. 51 billion, (ii) lay off of close to 35,000 employees in two phases from public sector
banks and (iii) closing of over 2000 un-banked branches. To reduce the level of NPLs, the
Government and SBP coordinated to establish the Committee for Revival of Sick Industrial
Units (CRSIU) and the Corporate and Industrial Restructuring Corporation (CIRC) which
together enabled debt recovery of Rs. 15.1 billion, while settling write offs to acquire the
2222
Non-Performing Loans (NPLs) are loans and advances whose mark-up/interest or principal is overdue by
90 days or more from the due date. Net Non-Performing Loans (NPLs) is the value of non-performing loans
minus provision for loan losses. (Source: Glossary, Quarterly Performance Review of Banking System)
23
The final version of New Capital Adequacy Framework (Basel II) was released in June 2004 by Basel
Committee on banking supervision (BCBS). The Basel II Capital Accord is not a treaty. It is based on
consensus building approach to enhance the interaction between supervisors and the end users. It aims to: a)
align bank’s capital with their basic risk profiles, and b) to give impetus to development of a sound risk
management system and in this way, it leads to more efficient, equitable and prudent allocation of financial
resources. The new capital framework under Basel II is built on three naturally reinforcing pillars; the first
pillar Regulations – aligns the minimum capital requirements more closely with bank’s actual underlying risk
.The second pillar – Supervision – addresses the need of “effective supervisory review” by allowing the
supervisors to evaluate a bank’s assessment of its own risk and determine whether that assessment seems
reasonable. And the Pillar III – Market Discipline – ensure that effective market discipline provides an extra
set of eyes besides the supervisor
23
NPLs of public sector banks. Secondly, post-liberalization period enunciated a healthy

9
competition that persuaded banks to reduce cost of intermediation, diversify products
through innovation, provide better services to clients, broaden the client-base, retain
clients’ confidence etc. Thirdly, the reduced costs of financial intermediation accompanied
by better customer service & diversified products is helping in mobilizing more saving that
is then being used to finance prudent investments. Fourthly, SBP’s regulatory and
supervisory framework, administered by highly qualified cadre of staff in line with the
international best practices and norms, is also the base of this boom. Fifthly, the prudent
use of IT (starting from ATMs to E-banking) is providing banking system an increased
customer base, cost saving, mass customization, development of non-core business,
offering of services regardless of geographic area and above-all introducing branchless
banks- with no associated cost such as rent & staff.24
3.3 ANALYSIS OF BOOM
There are number of ways to gauge the efficiency & growth of a banking sector. However,
keeping in view the limitation of our study we will use selected few main indicators based
on accounting data.
3.3.1 Profitability
Between CYs 2005 and 2008, when the economy witnessed an average growth of
more than 7.5 per cent, average pre-tax profitability in banking sector stood at Rs.
108.1 billion and at Rs.73.5 billion after paying the taxes. By the 3rd quarter of
CY09, it stood at Rs. 70.1 billion (pre- tax) and Rs. 42.2 (after-tax). It is likely to
improve further in coming quarters because of improvement in macroeconomic
indicators and increase in credit to private sector that remained negative during
most parts of 2008 and 2009. (Please see Table underneath)
24
N. Muhammad Resheed, ‘Analysis of Internet Banking Issues in Pakistan: (A Case Study Internet Banking
Issues in Pakistani Community)’, 2007
10
(Source: Quarterly Performance Review of Banking System CY 05-09, SBP 2009)
3.3.2 Solvency25
The banking system of Pakistan has been posting consistent improvement in risk-
based Capital Adequacy Ratio (CAR26) since the introduction of Basel-II
framework. The global financial crisis was a test for Pakistani banks; however,
banks largely maintained their resilience & registered improvement in key solvency
indicators. No doubt, NPLs have been & still are creating stress but a system whose
asset-base is growing by 6% has the tendency to show resilience against risks.
Accordingly, due to growth in asset base, the capital to total assets ratio of
Pakistani banks has also improved over the period from 2005 to onwards. (Please
see Table underneath).
25
In finance or business, solvency is the ability of an entity or individual to pay debts. Solvency can also be
described as the ability of a corporation to meet its long-term fixed expenses and to accomplish long-term
expansion and growth. The better a company's solvency, the better it is financially. When a company is
insolvent, it means that it can no longer operate and is undergoing bankruptcy. Solvency is a different
concept from profitability, which refers to the ability to earn a profit. Businesses can be profitable without
being solvent (e.g. when they are expanding rapidly). Businesses can be solvent even while losing money
(e.g. when they cannibilize future cash flows, like sellingaccounts recievable). A business is bankrupt when it
is unprofitable and insolvent. (Source: Wikipedia)
26
Capital adequacy ratio (CAR), also called Capital to Risk (Weighted) Assets Ratio (CRAR), is a ratio of
bank’s capitals to its risk. National regulators track a bank's CAR to ensure that it can absorb a reasonable
amount of loss and are complying with their statutory Capital requirements.
11
(Source: Quarterly Performance Review of Banking System, SBP 2009)

The concentration analysis for solvency indicators in terms of asset size of the banks also
depicts improvement across all banks, with top five banks significantly contributing to
strong solvency position of the system (see Table underneath)
3.3.3 Balance Sheet Analysis

The asset base of the banking system not only remained stable during CY 05-09 but
also showed a remarkable growth over the years. (Please see Table underneath).
During five years from 2003-07, banks’ deposits grew successively at an average of
18.1 %, though during CY08 they fell to 9.4 % due to economic recession.
Financial experts take a growth in banks’ deposits as detrimental to overall strength
of economy as banks in such a case offer low interest rates on deposits and charge
high interest rates on loans to boost interest incomes. The banks avoid sharing their
earnings with the depositors, to the extent they should, on the pretext that increase
in inflation and administrative & operational expenses have left them with no other
viable option. A win-win situation (for both the banks & general public) has
however been created by SBP as it has instructed the banking sector to pay a
minimum of 5% on all categories of savings/PLS deposits from June 2008”. 27.

12
Accordingly, the composition of the asset base has been shifting away from
advances to investments - and internal composition of advances from private sector
to public sector and from SME and Consumer to Corporate segment. (Please also
see Annex III & V for details)
Chapter 04
27
BPRD Circular No. 7 dated May 30, 2008.
ISLAMIC BANKING–A NEW STORY OF SUCCESS 13
4.1 INTRODUCTION
Since its emergence in 1970s Islamic finance has grown significantly. There are now more
than 300 IFIs operating in around 75 countries. According to an estimate, total shariah
compliant assets worldwide have grown to about US$ 700 billion – with annual growth
exceeding 10.0 % during the past decade28 and are projected to grow to US$ 1.6 trillion by
2012.29 Islamic banking and Sukuk represent the most well established forms of Islamic
finance, whereas Takaful and shariah-compliant mutual funds are also evolving rapidly. In
terms of contribution to the global shariah-compliant asset base, Islamic commercial banks
take the lead with a 74% of assets30.
4.2 BRIEF HISTORY OF ISLAMIC BANKING IN PAKISTAN
In Pakistan, since its re-launch in 2002, Islamic banking31 has grown progressively
showing 59 % per annum increase in asset base since 2005. As a proportion of the overall
banking industry, the combined share of Islamic banking is 5.3 % in deposits and 5.5 % in
assets. Total assets of Islamic banking industry have grown to Rs. 323 billion while their
deposits have reached to Rs. 245 billion till September 200932. The branch network of six
full-fledged Islamic banks and 13 conventional banks, covering 80 cities33, has increased
up to 560.
4.3 ISLAMIC BANKING– PERFORMANCE REVIEW
4.3.1 Profitability
IBIs are in the process of growing, yet their profitability is remarkable. Since
CY2007, their profit after tax has been crossing Rs. 1 billon. During 2nd quarter of
CY 09, the profitability of IBs has picked up with an increase of more than 150 %.
It would further grow as the economy is showing improvement & also when IBs
penetrate into so far unexplored areas of agricultural & SMEs financing34.
28
Islamic Finance Outlook 2009, Standard & Poor’s, February 2009.
29
“The Next Chapter in Islamic Finance - Higher Rewards but Higher Risks”, Oliver Wyman, April 2009.
30
Islamic Finance 2009, International Financial Services London (IFSL) Research, February 2009.
31
Islamic banking refers to Islamic banks, Islamic branches of conventional banks and Islamic windows.
32
SBP’s Governor Syed Salim Raza’s address in Karachi on November 25, 2009 posted at SBP web-site.
33
Ibid
34
Till June 2009, the industry had very negligible exposure to agricultural financing and the share of SMEs
in overall financing was a mere 8.6 per cent. (Source: Article by Mohiuddin Aazim, posted at
14

4.3.2 Solvency
The CAR of the six dedicated Islamic banks as specified in the Basel II framework
clearly shows that with a target of achieving 9.0 percent CAR for CY0835, the
actual CAR achieved by IBs is significantly higher. CARs for the 4 new banks in
the industry indicate that both organic growth and implementation of Minimum
Capital Requirements (MCR) have helped in augmenting their capital base36.
4.3.3 Balance Sheet Analysis

Keeping in view the difficult competitive environment for the banking industry,
IBIs’ performance can be safely called as remarkable. Every newly established bank
takes three to four years to become profitable; with economic slowdown it might take
http://www.accountancy.com.pk, accessed on February 26, 2010).

35
BSD Circular No.30 dated November 25, 2008.
36
In terms of compliance with MCR, 4 out of the 6 dedicated Islamic Banks (IBs) have been able to meet the
MCR of Rs. 5.0 billion at end CY08. Two IBs were granted extension to meet the CY08 MCR requirements
in CY09, and one of them is now in compliance, while the other has planned a rights issue for Q3-CY09.
Albaraka Islamic Bank, on the other hand, is allowed to maintain an MCR of Rs. 2.0 billion in its capacity as
a branch of a foreign Islamic bank.
relatively longer period of time. But Pakistani IBs, though they are in an expansion phase
15
and resultantly their administrative costs are relatively higher, (please see Table
underneath) are still showing 60.0 % per annum growth in both the assets and
deposit base. The overall deposits of IBIs at the end of CY08 stood at Rs.201.7
billion and reflected a share of 5.9 % in banks deposits as compared to 1.4 % only
in 2003-04. Total assets of Islamic banks reached to Rs.276.3 billions from Rs.
44.1 billion in 2003-04 and contributed 5.8 % in banking assets till the end of
CY08. “Keeping in view the small size of the industry and its evolutionary nature,
the growth achieved so far has been impressive and has persistently outpaced its
conventional counterparts. The highest share in financing products of Islamic banks
is contributed by Murabaha, Ijara and diminishing Musharakah in 2008-09 (Dec).
Murabah is still the mainstay of Islamic banking though its share has reduced
substantially over the years. Ijarah and in particular musharakah now have sizeable
shares. With a share of 29 percent Musharakah is currently the second most
utilized mode of finance.”37
Chapter 05
ROLE OF BANKS IN PAKISTAN’S ECONOMIC DEVELOPMEMT
5.1 RESUME
37
Economic Survey of Pakistan 2008-2009.
Banks collect savings from the people and mobilize them for investment (preferably in
16
new sectors), thus working not only as storehouse of country’s wealth but also as tool for
development. Banks also promote the growth rate through restructuring their loan policies
and facilitating trade activities. The foreign capital also flows through banks to developing
countries for investment in projects. Banks also help a country to achieve balanced
development by transferring surplus from developed regions to less developed or under-
developed regions and also by offering investment in those sectors which are vital for the
growth of a country ( as they may not be as much vital for banks’ own benefits).
5.2 FINANCIAL STABILITY
The stability of the Pakistan’s financial system finds its roots in the predominant position
of the banking sector, as in comparison to other components of the financial system, the
banking sector has grown more in relative terms (Please see Table underneath).
(Source: Asian Development Outlook 2009)
The banking sector in Pakistan fulfills almost all the basic requirements of the function of
financial intermediation. The deposits of Pakistani banks have been growing successively
at an average rate of 18.1 % for the last 5 years.38 Deposit base rose to Rs 4.1 trillion and
gross advances to Rs 3.3 trillion by September 2008. Supported by the growing financial
intermediation process, banks’ aggregate profitability rose from Rs 63.3 billion in 2005 to
Rs 73.3 billion by 2007 and Rs 46.0 billion for half year 2008. The overall assets of the
banking sector have also increased from Rs. 3.6 trillion in December 2005 to Rs. 5.5
38
The growth in deposits did slowdown to 9.4 percent in CY08 due to global economic recession.
trillion by June 2008. Recapitalization and prudent lending has lowered banks’ net non-
17
performing loans (NPLs) to around 2.0 %.
5.3 DOMESTIC MACROECONOMIC DEVELOPMENTS
The economic growth in Pakistan has been largely consumption driven, with a low and
declining level of financial savings. Different domestic pressures (rise in inflation, imports,
fiscal deficit, etc.) & trend in the international commodity prices have been causing an
adverse impact on the country’s growth prospects such that GDP growth ultimately
declined to 2.0 % in FY09. Government’s macroeconomic stabilization program,
implemented39 by SBP with the support of the IMF SBA40, has full backing of banking
system. There is always a possibility that GDP growth is likely to improve in 2010 and
afterwards. (Please see Table underneath)
5.4 FDI
Profitability in Pakistan’s banking sector, emerging out of the growing size of the
economy, has brought a significant FDI in this sector. PICIC was acquired by Tamaesk
Holdings41 for $339 million, Union Bank by Standard Chartered Bank for $ 487 million &
39
It has been implemented from November FY09 onwards.
40
SBA stands for Stand-by Arrangement. In an economic crisis, countries often need financing to help them
overcome their balance of payments problems. Since its creation in June 1952, the IMF’s Stand-By
Arrangement (SBA) has been used time and again by member countries; it is the IMF’s workhorse lending
instrument for emerging market countries. Rates are non-concessional, although they are almost always
lower than what countries would pay to raise financing from private markets. The SBA was upgraded in
2009 to be more flexible and responsive to member-countries’ needs. Borrowing limits were doubled with
more funds available up front, and conditions were streamlined and simplified. The new framework also
enables broader high-access borrowing on a precautionary basis. (Source: http://www.imf.org accessed on
February 12, 2010)
41
Temasek Holdings is an investment company owned by the government of Singapore. With an
international staff of 350 people, it manages a portfolio of about US$127 billion, focused primarily in Asia. It
is an active shareholder and investor in such sectors as banking & financial services, real estate,
transportation & logistics, infrastructure, etc (Source: Wikipedia).
39
http://www.wikipedia.org.com accessed on February 26, 2010.
Prime Commercial Bank by ABN Amro for $228 million 42. The May Bank made the
18
biggest investment of US$ 907 million in banking sector (as it buys up to 20% of
Pakistan's MCB Bank43). Other countries flocking Pakistan for FDI in banking sector are
Switzerland with an investment of US$ 200 million, United Kingdom US$ 125 and Saudi
Arabia US$ 200 million. On the whole, the sector has induced FDI of US$ 4.2 billion over
the last 7 years.
5.5 FOREIGN EXCHANGE RESERVES
Pakistan's total liquid foreign exchange reserves stood at $14,123.5 million: according to
break-up, forex reserves held by SBP & banks were $10,494.0 million & $3,629.5
million44 respectively. Increased outreach of banks under Pakistan Remittance Initiative45
(PRI), a round-the-clock & securest initiative of sending remittances, has brought an
unprecedented increase in the inflow of remittances. These increased gradually from
almost $1.0 billion to $7.81 billion by the end of last fiscal year. During H1 FY-10 their
amount was $4.531 billion, displaying an increase of $891.07 million or 24.48 % over the
same period of last fiscal year.46
5.6 DEVELOPMENT FINANCE
Banks have been gradually increasing their role in enhancing Development Finance in
different sectors. Supportive regulatory framework of SBP & banks’ developed capacity in
these niche areas to fully tap their potential business opportunities is remarkable after
2002.
4240
The deal, which will be completed by the end of June, is expected to provide an opening for Maybank to
expand into Islamic banking, retail services, credit cards & SME.
41
Statement by SBP Governor appearing in daily the News on November 14, 2009.
42
The government of Pakistan conscious of the positive effects of remittances on an economy and poverty
alleviation, in the 3rd quarter of CY 09 launched PRI (Pakistan Remittances Initiative) to streamline flow of
remittances through commercial banks and official channels, against illegal transactions through hawala
system, with a focus on doubling the remittances within five years.
43
44
45
46
Qazi, S.M., ‘Remittance and Economic Development’ posted at http://economyofpakistan.blogspot.com,
accessed on February 26, 2010)
5.6.1 Micro-finance & SME

19
The overall outreach by microfinance sector (MFIs + MFBs) has remained positive
in terms of different outreach parameters. The number of borrowers has increased
up to 1.83 million. Similarly, number of depositors and policy holders also showed
a healthy growth with satisfactory increase in value of deposits and sum insured.
The overall MF deposits show positive growth of 20% at the end of June
2009.There has been a remarkable growth of 36.1% during the period June 05 to
June 09 in the SME number of borrowers. At the end of June 2009, SME borrowers
stood at 219,062 constituting about 4.7 % of the total borrowers in the banking
industry47.
5.6.2 Trade
Banks’ role in boosting trade after the introduction of Part I & II of Export Finance
Scheme (EFS48) & also Islamic Export Refinance Scheme (IEFS) in 2004 has been
tremendous. In November 2008 SBP also reverted to 100% refinancing instead of
previous practice of 70%. In short, refinance limits at Rs 221 billion assigned to the
various banks for current FY 2009-10 are 58% higher than limits on June 30, 2008.
47
While a duration wise analysis of the borrowers reveal that the share of borrowers availing long-term loans
( exceeding 3 years) was 42.6, short term loans ( up to 1 year) was 51.6 %and the medium term loans ( 1-3
years) constituted about 5.8% of the total SME borrowers
48
The Export Finance Scheme (EFS) was originally introduced in 1972 by SBP.
20
5.6.3 Agriculture
Agriculture is an important sector of our economy, a dominant driving force for
growth and the main source of livelihood for 66% of the country’s population. Its
share is about 17.9% in the total Development Finance portfolio. Banks disbursed
Rs. 233 billion during FY 008‐09 in agri-credit & the number of agri-loan
borrowers was 1.91 million at end June, 2009.
5.6.4 Housing Finance

The housing and construction sector of Pakistan with its higher multiplier effect of
having linkages with 37 allied industries49 is a key driver of the economy. After the
emergence of CBs in mortgage business, the housing finance portfolio has grown
considerably from Rs. 37 billion in 2004 to Rs 84 billion at the end of 200850.
5.6.5 Infrastructure Sector
49
Dr. Ishrat Hussain’s lecture in National Institute of Management, Karachi on February 24, 2010.
50
Governor SBP, Syed Salim Raza’s address to Association of Builders and Developers of Pakistan (ABAD)
posted at daily e-newspaper ‘Pakistan Times’ at http:// pakistantimes.net.com accessed on February 27, 2010.
The share of the Infrastructure Sector occupies second place after SME Finance
21
with 30.7% share in total DF portfolio, which on YoY basis, has registered a rise of
25.7%. It was mainly due to a significant rise in financing to power sector from Rs.
52.4 billion in June 2008 to Rs. 115.4 billion at the end of June 2009.
Chapter 06
RECOMMENDATIONS
6.1 HOW BANKS CAN HELP OUR ECONOMY TO GROW MORE?

The study has concluded that Pakistan’s banking industry has enormous potential to grow
as well as to support faster economic growth and development when compared with other
emerging market countries51 (EMCs). No doubt, banks are doing ‘good’ still they have a
22
full potential to do ‘the best’. How? Let us see.
6.2 EXTENDING BASE OF BANKING SERVICES
Pakistan has the highest number of people per bank branch in the region, second only to
Bangladesh. Currently 37 % of adults have bank accounts. Number of borrowers (5.5
million) constitutes only 3.5 % of population. There are only 171 deposit & 30 loan
accounts per 1,000 people. Over half of the population saves, but only 8 % entrust their
money to formal financial institutions. One-third of the population borrows, but only 3 %
use formal financial institutions to do so. Most services are concentrated in Karachi and
other urban centers while 2/3 of the population resides in rural areas. Thus out of total bank
depositors & borrowers 25% & 17% respectively belong to rural areas. Surprisingly, an
average of 42,000 rural-inhabitants has one bank branch.52
With 24 % of the population (nearly 40 million people) living below the poverty line, this
exclusiveness is critical, which banks can mitigate by extending their branches in rural
areas, introducing innovative delivery channels ( such as branchless banking) & enhancing
borrower-ship by crossing illiteracy and cultural and language barriers.
6.3 MICROFINANCE SECTOR
Reach of Microfinance in South Asia tells a different story; in Bangladesh & Sri Lanka it
is high (60% of the total poor), in India & Nepal it is medium (48% & 20% respectively))
and in Pakistan & Afghanistan it is low (5 % & 2% respectively). In spite of SBP
encouragement53, commercial banks have shown little appetite to serve microfinance
clients. The size of Pakistan’s microfinance market is in the range of 10-20 million active
borrowers.54 Women are a poorly explored clientele with tremendous potential. Currently
MFIs are supporting around 2 million active borrowers.
Recognizing microfinance as an important poverty alleviation tool, Pakistan needs a
special country-wide microfinance bank with a concept of ‘banking with the poor’. CBs
51
The term was first used in Basel II. EMCs in Asia include Bangladesh, Sri Lanka, Malaysia, Thailand,
Philippines, Indonesia, Vietnam, China, and India.
52
Pakistan Microfinance Network (PMN), 2008.
53
SBP claims to promote microfinance through different regulations, but surprisingly, at its website, it has
posted an argument that “the commercial banks and other traditional financial institutions are neither
mandated nor have the capacities to serve the microfinance market. They perceive the poor as high risk, high
cost and difficult to serve market and keep themselves away from them”.
54
Some estimates also place the number as high as 35 million.
should also deliberate that is their banking only for 6 million rich? Why not at least 20
23
millions be included to reap the benefits of over-all growth?
6.4 SME SECTOR
The SME55 sector is the backbone of Pakistan’s economy. There are approximately 3.2
million business enterprises in Pakistan & those employing up to 99 persons constitute
over 90 % of all and they also employ 78 % of the nonagricultural labor force. There are
around 214,948 SME borrowers (CY 08) as banks provide only 7–8 % of the total funding
requirements of SMEs in the country56.
There is a pool of nearly 3 million potential company customers to be tapped by the
banking sector. Banks can focus on smaller companies, farmers and the household sector.
SME Bank alone cannot perform miracle: however, if all the CBs go after a program-based
SME lending in harmony with human resource capacity helped by IT infrastructure, this
potential market can be fully captured.
6.5 ISLAMIC BANKING
IBs have been showing enormous growth potential since 2005. So far, IBs have no
branches in rural areas, where they clearly have a substantial customer base to explore.
SBP, under its new branch licensing policy, can persuade IBs to increase rural branches @
20% of all new branches opened; this figure can be risen upto 40%.
6.6 AGRICULTURE LENDING
Agriculture is a dominant driving force for growth. For Pakistan, a volume of Rs. 200+
billion agri-loan is not enough; it should be at least triple of that to meet 75-80% of the
agriculture credit requirements within 3 to 5 years. Moreover, there is a demand for
lending to the livestock, fisheries, horticulture & dairy sub-sectors according to the needs
of different areas.
To cope this, banking in rural areas demands new innovative approach of branching.
Existing SBP rules call for banks to establish at least 20% of their new branches in rural
areas, but as a matter a fact the number should be increased to 60%.
6.7 HOUSING SECTOR:
55
No single definition of SMEs at the country level exists in Pakistan. The Government of Pakistan defines
SMEs as enterprises that employ up to 250 people, have paid-up capital of up to 25 million Pakistani rupees,
and annual sales of up to 250 million Pakistani rupees. The State Bank of Pakistan, the Federal Bureau of
Statistics, the SME Bank, the Punjab Small Industries Corporation, and the Small and Medium Enterprise
Development Authority all have different definitions of the term.
56
IFC’s Report: ‘Pakistan: Microfinance and Financial Sector Diagnostic Study 2008
In Pakistan, until recently the state owned HBFC57 was the only player in the mortgage 24
market. The entry of CBs into housing finance business is a recent phenomenon. Pakistan
has an estimated shortage of about 7 million housing units, of which nearly two-thirds is in
low and middle income segments. The CBs' mortgage loan portfolio is concentrated in the
major 6-8 metropolitan cities of the country and also their average loan size is nearly 1/10th
of that of HBFC. For CBs, 70-80 % of the housing finance is for sale/purchase as they take
financing for new construction as more risky.
There is a dire need of an efficient Housing Policy in consultation with all the stakeholders
to meet not only the shortage of housing units but also to give a boost to micro-economic
developments.
6.8 GOVERNMENT-OWNED BANKS:

The House Building Finance Corporation Ltd. (HBFCL), Industrial Development Bank of
Pakistan (IDBP) and SME Bank have out-served their purposes58 as they have made only
limited contributions to the economic sub-sectors that they target. The fourth specialized
government-owned bank, Zarai Taraqiati Bank Ltd. (ZTBL), needs financial and
operational restructuring. This bank is highly strategic, as it provides about one third
(31.7%) of all credit to the agriculture sector.
In past different public sector approaches have failed to transform ZTBL due to is its
excessive debt liabilities & shareholding pattern. The Government should pave the way for
its eventual privatization, considered to be critical for augmenting its scale and efficiency.
6.9 INTEREST RATES
A distortion in interest rates deters effective mobilization of funds, and distorts possible
economic developments. A minimum deposit rate of 5 % p.a. for all PLS savings product 59
is not the remedy. The PLS system in its present form is unique to Pakistan and
57
House Building Finance Corporation
58
According to SBP’s ‘Pakistan 10 Years Strategy Paper for Banking Sector Reforms’ the weak financial
performances of these banks have forced them to borrow from the SBP. Thus the SME Bank is being
privatized, the HBFC restructured prior to privatization and the IDBP is being incorporated as a public
company and will be available for sale.
59
BSD Circular No.30 dated November 25, 2008.
59 Although PLS deposits originally were supposed to conform to Sharia principles, they were ruled non-
compliant by the Supreme Court in 1999. Since then, new conforming Islamic instruments have been offered
by IBIs. Given that the present PLS system awkwardly falls in between the two systems, there is a need of
streamlining the process so that depositors should know that they are offered conventional interest-based
deposits or conforming Islamic profit sharing deposits.
excessively beneficial to the banks60. Moreover, the interest-rates’ problem in case of CBs
25
lies with their loans; pleading them @ 14% & charging @ 30-40%.
The role of SBP and Banking Mohtasib, in such cases, needs a thorough revamping.
World-wide there are efficient mechanisms for consumer-protection while in Pakistan it is
weaker, not the weakest. A financial literacy program to cover both rural and urban areas
can be started, but more focus should be on the institutional remedy of this problem.
6.10 NEW BANKING ACT
There is a growing need of new SBP Act, that can establish the SBP as the primary
regulator and supervisor of all banks that can make, inter alia, perform its responsibility
for financial stability. New Act should clarify the SBP’s role as lender of last resort and
establish the conditions under which it may provide unsecured loans to institutions of
uncertain viability in situations when systemic stability is at stake. Infact SBP needs
unambiguous powers to intervene in unviable banks & non-professional banking by
reiterating its role as lead supervisor of financial groups, conglomerates and holding
companies.
CONCLUSION
The findings of the study reveal that banking system of Pakistan, since its different phases
of history, has not only been improving itself but has also shown a strong tendency to
compete with the forthcoming challenges. This base, as time has shown, proved enough in
60
giving the sector a boom that was impending in sector’s liberalization/privatization. After
26
its successful transformation into a liberalized as well as competitive sector, banking in
Pakistan is on the path of robust progress. To much of the good-fortune of banking
industry, Pakistan’s macroeconomic indicators are also showing robustness & strength.
With fiscal and external imbalances narrowing, the exchange rate stabilizing, foreign
reserves rising and headline inflation dropping sharply in country’s economy, the banking
system is converging with a conducive environment to play its maximum role in the
further improvement of this economy. Maximum in the sense that banking system can still
do a lot to help different sectors (like microfinance, SME, housing, etc) grow & stand on
their own feet which ultimately, in turn, would stabilize the general economy. Banking
sector has a full potential to do so. This particular study, with the help of different
quantitative & empirical analyses, has attempted to highlight certain areas which both the
banks & GoP can prioritize for further economic growth of the country. Overall, the
findings of this study also pinpoint the areas (i.e., case of banking sector’s outreach, role of
ZTBL vis-à-vis growth in agriculture through loans, case of CBs’ interest rates, plight of
microfinance & SME sectors, etc.) which need further elaborative studies in future. It has
always been desirable that the study of symptoms should conclude into the complete
treatment of the disease.
SELECTED BIBLIOGRAPHY
BOOKS & RESEARCH PAPERS:

• Arby, Muhammad Farooq, (2003) ‘Structure and Performance of Commercial
Banks in Pakistan’, State Bank of Pakistan, Karachi.
• Chaudhry, Imran Sharif, (2006) ‘Financial Liberalization and Macroeconomic 27

Performance: Empirical Evidence from Pakistan’, London School of Economics &
political Science, London, UK.
• Moin, Shahzad, (2008) ‘Performance of Islamic Banking and Conventional
Banking in Pakistan: A Comparative Study’ University of Skovde, Sweden.
• Azam Ali & Ansari, (2007) ‘Financial Sectors Reforms & Soundness of Banks
Operating in Pakistan’, State Bank of Pakistan, Karachi.
• Seema Siddiqua Hai, Safia Qamar Minhaj, and Roohi Ahmed, (2006)
‘Implementation of Basel II: Issues, Challenges and Implications for Developing
Countries’, University of Karachi, Karachi.
• M. Sharif, (2010) ‘The Financial Sector in the Midst of An Economic Slowdown’,
Business & Finance Review, January 11, 2010 issue, Karachi.
• Meenai, S.A., (1977) ‘Money and Banking in Pakistan’, Royal Book Company,
Karachi.
• Abid A. Burki & Shabbir Ahmad, (2008) ‘Corporate Governance Changes in
Pakistan’s Banking Sector: Is There a Performance Effect?’ University of
Management Sciences, Lahore.
• Montiel, P. J. (2003) ‘Macroeconomics in Emerging Markets’, Cambridge
University Press, London UK.
• Levine, R. (1997) ‘Financial Development and Economic Growth: Views and
Agenda’. Journal of Economic Literature, St. Martin Press, New York, USA.
• Oliver Wyman, (2009) ‘The Next Chapter in Islamic Finance - Higher Rewards but
Higher Risks’, Oliver Wyman Group, USA.
• Qayyum, Ahmed, (2006) ‘Financial Sectors Reforms & Efficiency of Banking in
Pakistan’, Pakistan Institute of Development Economics (PIDE), Islamabad.
• Rizvi, Zaigham Mahmood, (2008) ‘Housing and Housing Finance: A Social
Challenge and Economic Opportunity’, Housing Finance International, San
Francisco, USA.
• Adnan, Q. (2005) ‘A Study of Informal Finance Markets in Pakistan’,
Microfinance Network, Mexico.
• Badun, Marijana, (2008) ‘Financial Intermediation by Banks & Economic Growth:
A review of Empirical Evidence’, Institute of Public Finance, Zagreb.
• Rizvi, Syed Fawad Ali, (2001) ‘Post-liberalization Efficiency & Productivity of the
Banking Sector in Pakistan’, Pakistan Development Review 40: 4 Part II (Winter
2001).
• Harun, Sudin, (2004) ‘Determinants of Islamic Banks’ Profitability’, Global
Journal of Finance and Economics, USA, Vol. 1 No.1 (March 2004)
• Shahnaz A. Rauf & Tahir Mehmood, (2009) ‘Growth & Performance of
Microfinance in Pakistan’, Pakistan Economic and Social review, Volume 47, No.1
(Summer 2009)
• Hassn-Bano Burki & Shama Mohammed, (2008) ‘Mobilizing Saving from the
Urban Poor in Pakistan’, Shore Bank International Ltd. Karachi.
• Khalid, Umer, (2006) ‘The Effect of Privatization and Liberalization on Banking
Sector Performance in Pakistan’, State Bank of Pakistan, Karachi.
REPORTS:
• ‘Towards Achieving Social and Financial Sustainability, SBP (2008). 28

• Financial Stability Review 2008-2009, SBP (2009).
• Monetary Policy Statement 2010, SBP (2010).
• ‘The State of Pakistan’s Competitiveness Report 2009, CSF (2009)
• ‘Islamic Finance 2009, IFSL, (2009).
• Pakistan Microfinance Network (PMN), 2008.
• ‘Pakistan: Microfinance and Financial Sector Diagnostic Study 2008, IFC (2008)
• ‘Microfinance in South Asia: Towards Financial Inclusion for the Poor’, WB
(2009).
• ‘Pakistan Economic Update 2009’, WB (2009).
• Islamic Finance Outlook 2009, Standard & Poor’s, (2009).
• ‘Asian Development Outlook Update: Broadening Openness for a Resilient Asia’,
Asian Development Bank (2009).
WEBSITES:
• http://www.sbp.org.pk
• http://www.finance.gov.pk
• http;//www.mixmarket.org.com
• http://www.wikipedia.org.com
• http://www.imf.org
• http://www.accountancy.com.pk
• http:// pakistantimes.net.com
Annex-I
Group-wise Composition of Banks.

29
30
31
Annex-III 32
Compositions of Banks’ Total Assets & Deposits

33
Annex-V 34
35

Boom of Banking in Pakistan

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Boom of Banking Industry in Pakistan

Individual Research Paper (IRP)

8th Mid Career Management Course

Boom of Banking Industry in Pakistan

Paper supervised by:

SAEED AHMED SHEIKH

1.1 INTRODUCTION TO THE STUDY

BANKING IN PAKISTAN - A BACKGROUND HISTORY

2.1 FORMATIVE PHASE (1947-1948)

2.3 PHASE OF GROWTH (1959-1970)

1 Metropolitan Bank Limited, 13 Bank AI-Habib Limited

6 Schon Bank Limited 18 Habib Credit & Exchange Bank

Source: FSA 1990-2000

The process of denationalization/privatization of Nationalized Commercial Banks (NCBs)

BOOM OF BANKING INDUSTRY IN RECENT YEARS 8

3.1 A REAL BOOM BY ALL INDICATORS

NPLs of public sector banks. Secondly, post-liberalization period enunciated a healthy

(Source: Quarterly Performance Review of Banking System CY 05-09, SBP 2009)

(Source: Quarterly Performance Review of Banking System, SBP 2009)

(Source: Quarterly Performance Review of Banking System, SBP 2009)

3.3.3 Balance Sheet Analysis

minimum of 5% on all categories of savings/PLS deposits from June 2008”. 27.

(Source: Quarterly Performance Review of Banking System, SBP 2009)

ISLAMIC BANKING–A NEW STORY OF SUCCESS 13

(Source: Quarterly Performance Review of Banking System, SBP 2009)

4.3.3 Balance Sheet Analysis

http://www.accountancy.com.pk, accessed on February 26, 2010).

(Source: Quarterly Performance Review of Banking System, SBP 2009)

(Source: Asian Development Outlook 2009)

5.6.1 Micro-finance & SME

5.6.4 Housing Finance

6.1 HOW BANKS CAN HELP OUR ECONOMY TO GROW MORE?

6.8 GOVERNMENT-OWNED BANKS:

BOOKS & RESEARCH PAPERS:

• Chaudhry, Imran Sharif, (2006) ‘Financial Liberalization and Macroeconomic 27

• ‘Towards Achieving Social and Financial Sustainability, SBP (2008). 28

Group-wise Composition of Banks.

Compositions of Banks’ Total Assets & Deposits

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