BANKING SYSTEM IN PAKISTAN
A chequered history
By SHUJAT ALI BAIG
Dec 06 - 12, 1999
The banking system is passing through a difficult phase mainly because of excessive political interference in the working of the nationalised banks by the different governments in the past. Hence the political interference in nationalised banks did not allow them to carry out their business purely on merit.
It may be recalled that some twenty years back, the banking system was working on such a solid ground that various developing and under-developed countries used to take guidelines from Pakistani banks.
A little earlier before the creation of country, the role of Muslims of the areas which were later included in Pakistan was of no significance due to their restricted participation in the banking sector. There was only a small bank namely Australasia Bank having a few branches in Lahore and its suburbs. In 1942, the Australasia bank was housed in a garrage of a trader of Lahore who used to trade at a small scale with Australia during that period. However the only Bank was run by the Muslims of the sub-continent was Habib Bank which was established in 1941. At that time Quaid-e-Azam Mohammad Ali Jinnah expressed his desire that another Muslim bank also be established in Calcutta which came into reality when Adamjee with the assistance of Isphanis established Muslim Commercial Bank a few months before the creation of Pakistan in Calcutta. When Pakistan came in to being The Habib Bank shifted its Headquarters from India to Karachi. A few of Habib Bank's branches were already in operation in Pakistan. The Muslim Commercial Bank also moved its headquarters from Calcutta to Dhaka and later on to Karachi. At the time of independence, another small bank namely Bank of Bahawalpur also started business from Bahawalpur from December 1947.
Before independence, the financial sector was in the hands of foreign banks some of them were British by origin. The oldest bank operating from 1883 in this part of the world was the Chartered Bank while another bank namely the Grindlays Bank which was also working simultaneously from 1883. In order to expand its business operations, the Grindlays acquired other small banks and merged them into the business of Grindlays. For example Allied Bank, National Bank of India etc were merged into Grindlays Bank. Among the contemporaries, Imperial bank of India was the largest Indian Bank which had started its operations in 1919 which was discharging the role of a commercial banks as well as the Central Bank for India until an independent Central Bank i.e. Reserve Bank of India was established in 1935. However, since the Imperial Bank had the largest network of its branches all over India, it continued to play its role as a subsidiary of the Reserve Bank of India. In the Muslim majority areas which was later on became the part of Pakistan, small branches of Indian banks were operating and soon after creation of Pakistan they shifted their branches and headquarters to India. At the time of independence, two major banks including Punjab National Bank at Lahore and Comila Banking Corporation were working in the then East Pakistan. This trend was so obvious that the total number of bank offices between June 30, 1918 and August 14, 1947 were reduced from 631 to 195 only. During the early part of 1949 the number of branches of Imperial Bank of India in Pakistani areas were more than of Habib Bank. In the early days of Pakistan, the government worked hard left no stone unturned to establish and strengthen the banking system in Pakistan. These efforts resulted in the establishment of State Bank of Pakistan which was inaugurated by Quaid-e-Azam on July 1, 1948. Quaid-e-Azam flewed from Quetta to Karachi specially to grace the occasion. Originally the State Bank was scheduled to be established in September 1948. Zahid Hussain, who was the first Governor of the State Bank devoted all his time and energy to streamline the working of the State Bank. In normal situation, the Central Bank of a country is only established when the commercial banking start working on sound footings. But the circumstances forced the government to establish Central Bank and the task of stabilizing the commercial banking was also assigned to the State Bank, which it really did.
The establishment of the National Bank of Pakistan in 1950 on the pattern of Imperial Bank of India was yet another milestone in the banking history of Pakistan. In September 1949 the rupee value was reduced against the Pound sterling which was a major event in the banking circles. Consequently Indian government devalued its Rupee against Pound Sterlings, however Pakistan decided not to devalue its currency against Pound Sterling which resulted in increase of Pakistani cotton and jute prices for India which affected our exports to India. Though Pakistan had to suffer economically due to decline of exports to India, it however gave a sense of economic independence to Pakistan. Cut in imports from Pakistan proved as a blessing in disguise as Pakistan had to explore new exports markets for its products. However Indian banks operating in Pakistan refused to finance Pakistani exports.