BANKING IN PAKISTAN The territories that were to become Pakistan were generally well supplied with commercial banking facilities in early 1947 Of the 3,496 offices of Indian commercial banks, 487 were located in what became Pakistan However, the entire banking sector was owned by non-Mulims, mostly Hindus The plan to partition British India was announced on 3 June 1947, and Pakistan became an independent nation on 14 August 1947, one day before India In the intervening period of 10 weeks many of the banks transferred their headquarters, assets, and funds to the areas that were to be part of independent India The Hindu bank owners as well Hindu bank professionals migrated en masse to India, leaving Pakistan underserved with commercial banking In Pakistan the number of bank offices declined to only 69 immediately after partition Banking facilities were curtailed even for government business The Imperial Bank of India, which was responsible for government treasury work and worked as the agent for the Reserve Bank of India, the Indian central bank, had 19 offices in the areas that were now Pakistan; these offices ceased to operate after partition Muhammad Ali Jinnah, Pakistan’s founding father, recognized that without a banking system the country would not be able to make economic advances
He had already persuaded the Habib family, a family that had built a large commercial business in Bombay (Mumbai) during World War II, to open a commercial bank Habib Bank Limited started operations in Bombay and moved its headquarters to Karachi, which was initially selected to be the new country’s capital, and began building a network of branches in West and East Pakistan A number of new banks also began operations Between 1 July 1948 and 30 June 1954, 180 offices were opened by the banks wholly owned by Pakistanis In 1948, the government established the National Bank of Pakistan which assumed responsibility for government treasury functions Despite this, the coverage of banking was still less than that at the time of partition Under the Pakistan Monetary System and Reserve Bank Order 1947, the Reserve Bank of India was authorized to operate in Pakistan until 30 September 1948 This interim arrangement was necessary because of the difficulties involved in establishing a new central bank, but the arrangement proved to be impractical since the two countries immediately became embroiled in disputes concerning the transfer of monetary assets Accordingly, the government of Pakistan took over all central banking functions, including public debt and exchange control, by establishing its own central bank, the State Bank of Pakistan The bank was inaugurated on 1 August 1948 by Governor General Muhammad Ali Jinnah Pakistan’s first investment bank, Pakistan Industrial Credit and Investment Corporation (PICIC), was established in 1957 with assistance from the World Bank that provided the institution’s capital
This was a semi-public sector institution since it was listed on the Karachi Stock Market with a small proportion of capital offered for private subscription PICIC made loans and equity investments for the expansion of existing and/or the establishment of new enterprises It was to act not only as financier but to undertake promotional activities as well The World Bank later established several other public sector investment banks, among them the Industrial Development Bank of Pakistan (IDBP) for medium-sized industries, the Agricultural Development Bank of Pakistan (ADBP), and the National Development Finance Corporation (NDFC) for providing finance to public sector enterprises It was during the administration of President Ayub Khan that commercial banking quickly developed in the country What was distinct about the situation in Pakistan was that whereas most other developing countries, India included, developed banks in the public sector, Ayub Khan encouraged private entrepreneurs to step into this part of the economy During this period, Allied Bank, Habib Bank, Muslim Commercial Bank, United Bank Ltd, and government-owned National Bank of Pakistan quickly expanded their operations, establishing new offices all over the country By the end of the 1960s, Pakistan had a thriving banking sector Some of the new banks were owned and operated by large industrial houses; this led to the widespread perception that people’s savings were being used for the creation of private industrial wealth This led to the decision by President Zulfikar Ali Bhutto in January 1972 to nationalize all privately owned commercial banks Since investment banking was already in the control of the government, Bhutto’s nationalization brought almost the entire banking system and all banking assets under government management
The government’s control of banking led to widespread corruption since those in power used the banks to provide loans to themselves and to their relatives and friends Under pressure from the International Monetary Fund, to which successive governments turned in the 1990s in order to obtain capital for servicing foreign debt, a program was initiated to privatize the banking sector Muslim Commercial Bank was the first bank to be privatized by the administration of Prime Minster Mian Nawaz Sharif in 1992 It was bought by Mian Muhammad Mansha, who owned and managed one of the largest industrial houses in the country United Bank was the next large bank to be sold, this time to a foreign consortium that included a Londonbased businessman, Sir Anwar Pervez In 2003, the Agha Khan Foundation bought Habib BankIn 2006, Pakistan’s banking sector was made up of 36 commercial banks (four still owned by the government, 11 owned by foreigners, 21 owned by Pakistanis), six development financial institutions, and two micro-financed companies As a result of privatization, 80 percent of the banking assets are held by privately owned institutions There were 6,974 bank offices operating in the country in December 2004, of which 67 were owned by foreign banks Since the period of the presidency of Zia ul-Haq, Pakistan has also brought Islamic banking into the country This has been done at two levels
The first was simply a change in banking terms, replacing interest-bearing accounts with profit-and-loss accounts These changes did not alter in any significant way the operation of the banking system However, some serious attempts were made to establish new institutions that operated according to the tenets of Islam For instance, the Mizan Bank, an affiliate of the Pakistan-Kuwait Development Fund, accepted only those deposits on which returns were based on the institution’s net earnings The bank provided only equity finance for projects that met the requirements of a board familiar with Islamic principles The government of President Pervez Musharraf has declared that it will operate Islamic banking along with the conventional system.