Evolution of banking in Pakistan.

Evolution of banking in Pakistan.

Commercial banks constitute the most important source of institutional credit in the economy. As the country’s largest deposit institutions and the main source of short-term credit, they form the heart of the financial system.

At the time of independence, there were two banks incorporated in the undivided India in first half of 1940s’ whose owners were Muslims. After independence they decided to establish their head office in Pakistan, thus laying the foundation of banking in this country.

The National Bank of Pakistan was set up in November 1949 in crises conditions following the first trade deadlock with India. The original intention was to establish it sometime in 1950. The plans for its establishment had to be advanced in view of the critical situation, which developed especially in the jute trade as a result of India’s refusal to accept the exchange rate of the Pakistani Rupee following the Indian devaluation of 1949. The bank was set up through an Ordinance on 19 November 1949 and started its operations with five offices located at important jute centres. It played a notable role in financing the jute trade in collaboration with the Jute Board. In 1952, the National Bank of Pakistan took over the agency work of the State Bank of Pakistan to transact government business and manage currency chests at places where the state bank did not have an office of its own.

Prior to nationalization, the government owned 25 percent of the share capital while others held the remaining 75 percent. Following nationalization, the capital held by others was transferred to and invested in the federal government. Prior to nationalization, a Central Board of Directors governed the National Bank but consequent upon nationalization, the Central Board was dissolved and in its place an Executive Board consisting of a President who is the chief executive and four other members were appointed for the general direction and superintendence of the affairs and business of the bank.

All Pakistan banks were nationalized with 100 percent federal government ownership in 1974 and by now all nationalized banks stand disinvested and privatized. These aspects shall be discussed in detail in due course of time’

There were as many as thirty-four foreign banks with 172 branches at the time of in dependence. With the closure of many of the banks, the number had declined to twenty-one by June 1980. The Indian Banks, which numbered nine were entrusted to the Custodian of Enemy Property after the 1965 Indo-Pak war. Among foreign banks, a distinction was usually made between banks having their head offices in India and those with head offices in other countries. Foreign banks, other than the Indian banks, were commonly known as exchange banks in the early years. The term owed its origin to the fact that, prior to independence; foreign banks in the Indo-Pakistan subcontinent were engaged primarily in the financing of foreign trade. Seven exchange banks incorporated abroad were operation in Pakistan at the time of independence. Most of thse banks were of British origin. There were twenty-nine Indian Banks operating in the territories of Paksitan at the time of Independence but they gradually curtailed their business and their number stood at nine in 1965 when they were taken over by the Custodian of Enemy Property. The banks that were taken over were: (1) State bank of India; (2) Central Bank of India Ltd.; (3) Bank of India Ltd.; (4) United Commercial Bank Ltd.; (5) Punjab Commerce Ltd.; (7) United Bank of India Ltd.; (8) Bank of Baroda Ltd.; and (9) United industrial bank Ltd. Besides, there were as many as twelve non-schedule Indian banks which were also taken over by the Custodian of Enemy property following the 1965 Indo-Pakistan War.

Very few foreign banks have been attracted to Pakistan during the financial liberalization period. Indeed several have sold out to private Pakistani banks and terminated operations in Pakistan.

 Evolution of Commercial Banks in Pakistan

As already discussed that at the time of independence, there were only two banks, which were incorporated in undivided India and whose owners were Muslims ,they opted to shift their Head Offices in Pakistan. With the establishment of SBP, the other banks also came into existence and by 1973 number of banks increased to fourteen.

Nationalization of Banks in Pakistan:

In 1974, the banks in Pakistan were nationalized through an Act called Nationalization Act, 1974. From 1991, the policy of liberalization of economy has been adopted whereby, nationalized banks have been de-nationalized and banking sector has been disinvested. At present banking sector is visibly growing at tremendous pace. These aspects shall be discussed at length in due course.