BANKING SYSTEM IN PAKISTAN
BY SHUJAT ALI BAIG
Dec 27, 1999 - Jan 02, 2000
The separation of East Pakistan and induction of Pakistan People Party (ppp) government led by Z.A. Bhutto were the most significant events of early 70s having far reaching effects on Pakistan's banking system.
The ppp government which believed in nationalization of the key sectors of the national economy, nationalised all Pakistani banks on January 1,1974. Though foreign banks were not affected under the policy of nationalization, however all life insurance companies, both Pakistani and foreign were taken over by the government under its policy of nationalization in 1972. The business operations, assets and properties of the taken over insurance companies were merged under the aegis of State Life Insurance Corporation.
In the banking sector, the ppp government decided to retain only five major banks and the remaining taken over banks merged into these five banks. As a result of this policy, Habib (overseas) Bank and Standard Bank were merged into Habib Bank Limited, while Bank of Bahawalpur, Eastern Merchantile Bank and Easter Bank Corporation were handed over to the nationals of Pakistan. The Commerce Bank and Union Banks were amalgamated with the United Bank Ltd and the Premier Bank was merged into Muslim Commercial Bank. Over half a dozen small banks operating in Punjab and NWFP were merged with Australasia Bank under a new title of Allied Bank of Pakistan.
Consequent to the process of amalgamation of different banks into five big banks, serious problems were developed in the personnel adjustments in different banks. Before the merger of banks, the smaller banks were run by comparatively low paid and less qualified staff but with high ranks and designations. Their adjustment with the high cadre staff of larger banks created problems for the banks in the early days of nationalization. In order to solve this problem, identical new grades, pay scales and positions were introduced by the finance minister Dr. Mubashir Hasan, who also formed Pakistan Banking Council to play the role of a coordinator between the nationalized banks and the government.
The nationalized banks as well as the Banking Council gradually infested with bureaucratic approach marring the whole concept of serving the people. Practically speaking, the nationalized banks assumed the role of the government departments. New recruitments and promotions were made under quota system, new rules were introduced for retirement age of the employees. The appointment of Presidents and Senior Executives of the nationalized banks was made by the government while finance minister or senior bureaucrats in the finance ministry had the powers for transfers and postings of the bank staff. The Pakistan Banking Council instead of working as a professional body started behaving like a power state within the state. The bankers in order to get promotions, or postings at better places had to remain in good books of the Banking Council by appeasing them through different ways. Generally speaking the chief executives or presidents of the banks were allowed to remain at a position not for more than two and half years. Since these chiefs of the banks were not sure about their term of service they do not prefer to work professionally instead they made all efforts to have good relations with Banking Council. This naturally badly affected the performance and growth of the banks in Pakistan. The much politicization in the banks ruined the whole atmosphere of professional working. The bureaucrats used to dictate the senior officials of the banks which greatly contributed gross maladministration, malpractices and economic frauds in the financial sector of Pakistan. As a result of this mess up in the banking sector, the genuine professionals in the banking sector either left Pakistan for abroad or were sent on forced retirement. It was a situation when people of comparately low I.Q were running the whole show in the banks.
That was the time when professional honesty started phasing out and corruption sneaked into the banking sector. Bank loans on political consideration was a common feature. Despite knowing that chances for recovery of these loans were remote the bank chiefs had no option but to extend the loans. This rampant political corruption was at its height during 1980s and early 90s.