The Ups & Downs of Banking in Pakistan
Banking in Pakistan has had a long and turbulent history, marked by periods of growth and decline, innovation and stagnation, regulation and consolidation. In this article, I will trace the evolution of banking in Pakistan from the early days of independence till now, highlighting the major banks, events and challenges that shaped the sector.
The Early Days of Independence (1947-1970)
Banking in Pakistan formally began during the period of colonialism in South Asia, when much of Pakistan was controlled by the British Empire. In 1947, Pakistan gained independence from the British Raj and established the State Bank of Pakistan (SBP) as its central bank, with its headquarters in Karachi. Prior to independence, the Reserve Bank of India acted as the central bank for what became Pakistan.
Central Bank
The SBP was initially mandated to develop commercial banking channels, and maintain monetary stability so trade and commerce could flourish in the newly-created state. Subsequently, Habib Bank, Allied Bank and National Bank were amongst the first to start operations with strong support from the central bank. These banks were mainly focused on serving the urban and industrial sectors, while rural and agricultural sectors remained largely neglected.
By 1970, there were 14 domestic banks and 10 foreign banks operating in Pakistan, with a total of 3,300 branches. However, the banking sector was still dominated by a few large banks that accounted for more than 80% of deposits and advances. Moreover, there were widespread complaints of nepotism, corruption and inefficiency in the banking system.
The Era of Nationalisation (1971-1979)
In 1971, Pakistan faced a major political and economic crisis, as East Pakistan seceded to form Bangladesh after a bloody civil war. This resulted in a loss of more than half of the country's population, territory and foreign exchange earnings. The banking sector was also severely affected, as 1,411 branches of Pakistani banks were closed or taken over by Bangladesh.
Publicly Owned & Controlled By The State
In 1972, under the nationalisation policy implemented by Zulfikar Ali Bhutto’s government, all domestic banks were brought under full public control. The 14 domestic banks were consolidated into six nationalised banks: Habib Bank, United Bank, National Bank, Muslim Commercial Bank (now MCB Bank), Allied Bank and Commerce Bank (later merged with Allied Bank). The Pakistan Banking Council was set up to monitor nationalised banks, marginalising the SBP’s role as a regulator.
Victim Of Politics
These measures were meant to improve lending to prioritised industries such as agriculture, small-scale industries and exports. However, while directed lending increased from 22% to 50% of total advances between 1971 and 1979, it also resulted in political interference, corruption, inefficiency and often sabotage from former rich owners. The quality of loans deteriorated significantly, as many borrowers defaulted or rescheduled their repayments. The profitability and solvency of banks also declined sharply.
The Period Of Privatisation (1980-1999)
In 1980, under the military regime of General Zia-ul-Haq, a process of gradual privatisation was initiated in the banking sector. The SBP regained its regulatory authority and introduced reforms to improve governance, transparency and stability of the banking system. Interest rates, among other checks and balances were deregulated. Foreign exchange controls were relaxed and new private banks were allowed to enter the market.
Back Into Private Hands
Some of the major banks that emerged during this period were Bank Alfalah, Faysal Bank, Meezan Bank (the first full-fledged Islamic bank) and Askari Bank (owned by Army Welfare Trust). These banks brought more competition and innovation to the sector, offering a range of products and services to cater to different segments of customers.
In 1991-1992, four out of six nationalised banks (MCB Bank, Allied Bank, Habib Bank and United Bank) were privatised through public auctions. However, due to political instability and weak regulatory oversight, the privatisation process was marred by controversies and irregularities. Many buyers acquired large stakes in banks at low prices without proper due diligence.
The BCCI Downfall (1991)
One of the most famous episodes in the history of banking in Pakistan was the collapse of the Bank of Credit and Commerce International (BCCI) in 1991. BCCI was an international bank founded in 1972 by Agha Hasan Abedi, a Pakistani financier, with financial backing from Abu Dhabi. BCCI had over 400 branches in 78 countries and assets in excess of US$ 20 billion, making it the seventh largest private bank in the world .
However, BCCI's rise also caused major alarms in the West and the bank came under intense scrutiny of top financial players and Western intelligence agencies in the 1980, and became focus of a massive regulatory battle. In 1991 the customs and bank regulators in seven countries raided and locked down records of its branch offices. BCCI was forced to close down and liquidate its assets. Thousands of depositors and creditors lost their money, while many employees lost their jobs.
The Era of Consolidation (2000-2019)
The banking sector in Pakistan underwent a period of consolidation and restructuring in the 2000s, following the global financial crisis of 2007-2008. The SBP introduced prudential regulations and capital adequacy requirements to enhance the resilience and stability of banks. The SBP also encouraged mergers and acquisitions among banks to create larger and more diversified entities.
Mergers
Some of the notable mergers that took place during this period were: Habib Bank's acquisition of PICIC Commercial Bank in 2007; MCB Bank's acquisition of RBS Pakistan (formerly ABN Amro) in 2010; Faysal Bank's acquisition of Royal Bank of Scotland Pakistan (formerly Prime Commercial Bank) in 2010; Meezan Bank's acquisition of HSBC Pakistan in 2014; Summit Bank's merger with Sindh Bank (pending approval) .
Islamic Banking
The banking sector also witnessed the growth of Islamic banking, which is based on Shariah principles that prohibit interest and promote risk-sharing. As of September 2020, Islamic banking industry (IBI) assets and deposits of overall banking industry stood at 16.0 percent and 17.3 percent, respectively . There are 22 Islamic banking institutions (IBIs) operating in Pakistan; 5 full-fledged Islamic banks (IBs) and 17 conventional banks having standalone Islamic banking branches (IBBs) . Some of the leading Islamic banks are Meezan Bank, Dubai Islamic Bank Pakistan and BankIslami Pakistan.
More Foreign Ownership
Another aspect of banking in Pakistan is the presence of foreign banks and Pakistani banks operating in foreign countries. Some of the foreign banks that have branches or subsidiaries in Pakistan are Deutsche Bank AG, Citi Bank N.A., Industrial and Commercial Bank of China Limited and Standard Chartered Bank . Some of the Pakistani banks that have expanded their operations abroad are Habib Bank AG Zurich, United Bank Limited UK and MCB Bank Bahrain .
The Army-Controlled Banks
Pakistan also has some banks that are owned by the Pakistan Army or provincial governments. For example, Askari Bank is owned by Army Welfare Trust (AWT), Fauji Foundation owns Fauji Fertilizer Company Limited (FFC) which has a stake in Faysal Bank, and Punjab Provincial Cooperative Bank is owned by Punjab government. These banks are mainly involved in providing financial services to their respective stakeholders and beneficiaries.
2008 Financial Crises
The banking sector in Pakistan also faced some challenges and crises during this period, such as the global financial crisis of 2007-2008, the circular debt issue, the energy crisis, the security situation and the Covid-19 pandemic. These factors affected the performance and profitability of banks, as well as their asset quality and liquidity. The SBP intervened to provide relief and support to banks and their customers through various measures, such as lowering interest rates, extending loan repayment periods, providing refinancing facilities and relaxing prudential regulations.
The Current Scenario (2020-Present)
The banking sector in Pakistan is currently undergoing a phase of transformation and digitalisation, driven by changing customer preferences, technological advancements and regulatory reforms. The SBP has launched various initiatives to promote financial inclusion, innovation and competition in the sector, such as the National Payment Systems Strategy (NPSS), the Roshan Digital Account (RDA), the Raast Instant Payment System (RIPS) and the Regulatory Sandbox .
New Modes of Payments
The NPSS aims to modernise and enhance the efficiency of the payment system in Pakistan by providing a roadmap for its development over the next five years. The RDA is a digital banking platform that enables overseas Pakistanis to open bank accounts in Pakistan remotely and access various financial services. The RIPS is a low-cost and interoperable payment system that enables instant fund transfers between individuals, businesses and government entities. The Regulatory Sandbox is a framework that allows banks and fintech companies to test new products and services in a controlled environment with regulatory guidance.
Digital Banks
The banking sector in Pakistan is also witnessing increased competition from new entrants and challengers, such as digital banks, microfinance banks, branchless banking providers and fintech companies. These players are offering innovative and convenient solutions to cater to the unbanked and underbanked segments of the population, as well as to meet the evolving needs of existing customers. Some of the notable examples are Finja, SadaPay, NayaPay, Easypaisa, JazzCash and U Microfinance Bank.
Looking Ahead
The banking sector in Pakistan has come a long way since its inception in 1947. It has faced many ups and downs, opportunities and threats, successes and failures. It has also undergone many changes and reforms, adapting to the changing economic and social environment. It has played a significant role in supporting the growth and development of the country, as well as serving the financial needs of its people. It has also contributed to the global financial system, as well as to regional cooperation and integration.
As Pakistan enters a new decade of challenges and opportunities, its banking sector is poised for further growth and transformation. It has to leverage its strengths and overcome its weaknesses, embrace innovation and technology, enhance customer satisfaction and trust, ensure compliance and governance, manage risks and resilience, foster inclusion and diversity, create value and impact. It has to be ready for the future of banking.
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