Sep 15 - 21, 2008

The reserve bank of India , which was legally a common property of both India and Pakistan , continued to operate a currency and banking authority for Pakistan after independence. Pakistan's financial sector comprises of the State's central bank, State Bank of Pakistan , commercial banks, non-bank financial institutions (NBFIs) and insurance companies. The banking history describes a slow progress since inception of Pakistan till banking reforms in 90s. In the era of 50s, after incorporation of State Bank of Pakistan in 1948, private banks entered first time in the financial sector of Pakistan . The local banks expanded the operations in 60s, in 1963 there were 957 branches in both wings of Pakistan i.e. East and West. In 1974 the bank nationalization ordinance, , not only effect the banking and financial sector but also reflected negatively on the economic progress of Pakistan . Fourteen banks were nationalized, of which thirteen were merged into five banks. The State Bank of Pakistan was also nationalized; the official history of the State Bank of Pakistan writes 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 Islamization, Islamic concept in banking and finance sector came in 80s. Based on government's intention to eliminate interest from the economy, announced in February 1979, gave the target of three years. The Islamic modes of financing were launched in this regards includes a) Musharaka; b) Murabeha; and c) Mudaraba.

Pakistan economy comprises of two main components, the commodity producing sector (Agriculture and industry) and service sector, contributing adequately to growth. Since last five years, the contribution of service sector increasing its share in the total growth of Pakistan's economy. The outgoing year and the year before were termed as the service and consumption led growth. The three-fourth of the contribution to outgoing year's growth came from the services sector. The growth pattern describes the importance of the service industry in the economy. There has been strong linkage of service sector with both agriculture and industry.


Unlike other components of service sector, the finance & insurance also grew at high pace in the five years. The growth momentum of the component was high since inception of banking and financial sector in Pakistan . In the last five years, the share in service sector GDP enters in the double digit and the share in total GDP also double as compare to the share in 90s.

Average Share of Finance & Insurance in Pakistan's GDP (%)







FY00 - FY08

Average Share in Service Sector GDP







Average Share in Total GDP







Data Source: State Bank of Pakistan


Financial Sector Development and Economic development are inter-related. No economy can grow and improve the living standards of its population in the absence of a well functioning and efficient financial sector. Banks in Pakistan account for 90 percent of the financial sector and hence good health of banks is directly related to economic growth and development of Pakistan With the adoption of the market oriented policies in early 80s to attract the private investors to come forward, the banking and financial sector also affected and the growth in the sector take off with some moderate pace in 90s, and further intensify to a record in the 60 years of Pakistan, in the last five years. The banking reforms mainly includes the privatization of banks, focusing on improved corporate governance, enhancing efficiency and risk management, strengthening the financial sector, and defining prudential regulations for banking as well as other financial institutions of Pakistan.

After privatization and the introduction of banking and financial regulations, the industry enters in the era of challenges and competition, which in-turn improved the efficiencies of these institutions.

The product innovation was also the result of the relaxed policies and incentives to promote the consumer banking and services. The sector witness significant changes in terms of provision of services, expansion both in terms of network and services. During the last five years, there is huge expansion in menu of banking services especially in the consumer financing. The product of the sector involves, Small and Medium Enterprises (SME) financing, consumer financing (Credit Cards, Auto Loans etc.) and micro-financing (pro-poor financing).

In addition to changing regulations by the state bank of Pakistan , tightening monetary policy have significant effect on the banking industry of Pakistan . It is envisaged that with the current policy initiatives, increase in discount rate, increase in Minimum Capital Requirement (MCR) and Staturoty Liquidity Ration (SLR), the banking industry which increase its outreach by mushroom growth have significant negative effect. Due to mergers of banks, the branches have been closed, and staff levels have also been reduced. The banking industry in Pakistan may struggle to keep up with the changes in the regulatory environment, regulators struggle to manage their workload and effectively regulate their banks. The impact of these changes without considering the economic condition will lead to overall increase in bank failures. A rising interest rate environment may seem to help financial institutions, but the effect of the changes on consumers and businesses is not predictable and the challenge remains for banks to grow and effectively manage the spread to generate a significant return. Capital requirements of the banking sector have to be adequate to ensure a strong base, ability to compete and withstand unanticipated shocks. The minimum paid-up capital requirements of the banks have been raised from Rs 500 million to Rs 1billion and have again been raised to Rs. 2 billion (by December 31, 2005). This has already resulted in mergers and consolidation of many financial institutions and weeding out of several weaker banks from the financial system.

* Manzoor H. Memon, is a Senior Manager (Lead Economist) in JCR-VIS Credit Rating Co Ltd., An Affiliate of Japan Credit Rating Agency, Ltd.