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FINANCIAL
INSTITUTIONSBANKING SECTOR OF PAKISTAN
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Table of Contents
Acknowledgement..4
letter of transmittal5
Executive Summary ..................................................................................................................... 6
Introduction: ............................................................................................................................... 7
What is a Bank? ...................................................................................................................... 7
Functions of a Bank ................................................................................................................. 7
Products.................................................................................................................................. 7
Types of Banks ........................................................................................................................ 8
Pakistani Economy ...................................................................................................................... 9
Historical Background of Pakistani Banking Sector .................................................................... 10
Major Reforms in Banking in Last Decade ................................................................................. 10
Banks in Pakistan ...................................................................................................................... 14
State Bank of Pakistan............................................................................................................... 14
History .................................................................................................................................. 14
Major Functions .................................................................................................................... 15
Standard Chartered Bank Limited ............................................................................................. 16
History .................................................................................................................................. 16
National Bank of Pakistan ......................................................................................................... 16
Habib Bank Limited ................................................................................................................... 17
Mission ................................................................................................................................. 17
United Bank Limited.................................................................................................................. 17
History .................................................................................................................................. 17
Bank Islami Pakistan.................................................................................................................. 18
Competition Situation ........................................................................................................... 18
Image Marketing ................................................................................................................... 18
Credit rating .............................................................................................................................. 19
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PACRA ................................................................................................................................... 19
MOODYS .............................................................................................................................. 20
Bank-wise Major Statistics .............................................................Error! Bookmark not defined.
Sectors performance: ........................................................................................................... 21
Results of Study conducted between 2000-2007 regarding efficiency of Banks ..................... 21
Discussion ............................................................................................................................. 24
Main Competitors for Banking Sector ....................................................................................... 26
Challenges Ahead...................................................................................................................... 26
Conclusion ................................................................................................................................ 27
Bibliography .............................................................................................................................. 28
References ................................................................................................................................ 28
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ACKNOWLEDGEMENT
I would first like to thank Almighty Allah who gave me the strength to complete this
report. This report assignment has enabled me to get an insight on where the banking
sector stands in Pakistan. All credit goes to our respected course instructor Mr.
Sharique Ayubi who is conducting the Financial Institutions Course and who not only
encouraged us to learn about the course but also helped us out at our weaknesses. I
thank him again for providing his valued guidelines in not only the completion of the
report but also his pragmatic insight into the course.
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Letter of Transmittal
Respected Sir:
Here is a report on Banking Sector of Pakistan. I, SEHRISH ANIS, submit this report
to you on April 21, 2011.The purpose of this report is to get an insight on the current
state of Banking Sector of Pakistan, its history as well as its scope in the future.
I have made this report using different sources, such as articles pertaining to the topic
and information available on the internet.Around one week was devoted to the above
investigations.
I hope that the report is acceptable as per your requirements. I found the report making
process interesting, challenging and most of all, enabling me to get an in depth
knowledge of the banking sector of Pakistan.
Sincerely,
SEHRISH ANIS ID: 10465
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EXECUTIVE SUMMARY
The report Banking Sectorof Pakistan evaluates the current state of banking industry in
Pakistan. The report emphasizes on how the banking sector is performing under the global
economic crisis.
From the report we come to know that banking sector has shown a steady growth for the last
few years until 2008 when the economic crisis hit Pakistan.
There is huge amount of development still needed for the sector andthe growth, is however,
constrained by the lack of infrastructure support & dearth of professionals though this has
changed drastically in the last 5 years.
Currently,there are seven types of banks in Pakistan namely, Public Sector Banks, Islamic Banks,
Private Banks, Foreign Banks, Development Financial Institutions, Specialized Banks and Micro
Finance Banks. Under these seven categories there are 54 banks operating in Pakistan
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Introduction:
What is a Bank?
A bank is a financial institution whose primaryactivity is to act as a payment agent for
customers and to borrowand lend money. In other words, an institution where one canplace
and borrow money and take care of financial affairs.
A bank is a financial intermediary that accepts deposits and channels those deposits into
lending activities, either directly or through capital markets. A bank connects customers with
capital deficits to customers with capital surpluses.
Functions of a Bank
y Lending money to public (Loans)y Transferring money from one place to another (Remittances)y Acting as trusteesy Acting as payment agenty Keeping valuables in safe custodyy Government business
Products
Retail
y Business loany Cheque accounty Credit cardy Home loany Insurance advisory Mutual fundy Personal loany Savings account
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Wholesale
y Capital raising (Equity / Debt / Hybrids)y Mezzanine financey Project financey Revolving credity Risk management (FX, interest rates, commodities, derivatives)y Term loan
Types of Banks
y Commercial Banksy Offshore Banksy Private Banksy Islamic Banksy Central Banky Investment Banks
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Historical Background ofPakistani Banking Sector
Pakistans banking sector has historically moved from strength to strength, posting impressive
results along the way despite political and economical instability effecting the region. This
growth was a consequence of effective and efficient management practices and a well
regulated operating environment spearheaded by the State Bank of Pakistan.
Banking in Pakistan first formally started in Pakistan during the period of British colonization in
the South Asia. The first bank in the region (which was called India or Sub-continent at the
time), though conservative, was established in1786.
Pakistan's oldest bank is the State Bank of Pakistan, which is also the central bank of the nation.
Before independence on August 14, 1947, the Reserve Bank of India was the central bank of
what is now Pakistan. After independence, Muhammad Ali Jinnah took actions to establish a
central bank in Pakistan which resulted in the new founding of the State bank of Pakistan, with
its headquarters to be based in Karachi.
Major Reforms in Banking in Last Decade
Pakistans banking sector reforms which were initiated in the early 1990s have transformed the
sector into an efficient, sound and strong banking system. The most recent comprehensive
assessment carried out jointly by the World Bank and the IMF in 2004 came to the following
conclusion:
for reaching reforms have resulted in a more efficient and competitive financial system
In particular, the predominantly state-owned banking system has been transformed into
one that is predominantly under the control of the private sector. The legislativeframework and the State Bank of Pakistans supervisory capacity have been improved
substantially. As a result, the financial sector is sounder and exhibits an increased
resilience to shocks.
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The major changes that have occurred in the banking sector during the last decade or so
can be summarized as follows:
(a) 80 percent of the banking assets are held by the private sector banks and theprivatization of nationalized commercial banks has brought about a culture ofprofessionalism and service orientation in place of bureaucracy and apathy.
(b) The banks that were losing money due to inefficiencies, waste and limited productrange have become highly profitable business. These profits are, however, being
used to strengthen the capital base of the banks rather than paying out to the
shareholders. The minimum capital requirements have been raised from Rs. 500
million to Rs. 6 billion over an extended period in a phased manner. The
consolidation of the banking sector into fewer but stronger banks will lead to better
management of risk.
(c) The banks that were burdened with the non-performing and defaulted loans havecleared up their balance sheets in an open transparent, across-the-board manner.
Contrary to the popular myth the main beneficiaries of the write-offs of the old
outstanding and unrecoverable loans have been from almost 25 percent to 6.7
percent by Dec. 2005. Small individual borrowers the ratio of non-performing loans
of the Commercial Banks to total advances has declined.
(d) The quality of new assets has improved as stringent measures are taken to appraisenew loans, and assure the underlying securities. Online Credit Information Bureau
reports provide updated information to the banks about the credit history and track
record of the borrowers. Loan approvals on political considerations have become
pass. Non-performing loans account for less than 3 percent of all new loans
disbursed since 1997.
(e) The human resources base of the banks has been substantially upgraded by theadoption of the principles of merit and performance throughout the industry.
Recruitment is done through a highly competitive process and promotions and
compensation are linked to training, skills and high performance. The banks now
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routinely employ MBAs, M.Coms, Chartered Accountants, IT graduates, economists
and other highly educated persons rather than Clerical and Non Clerical Workers.
The banking industry has become the preferred choice of profession among the
young graduates.
(f) Banking Technology that was almost non-existent in Pakistan until a few years ago isrevolutionizing the customer services and access on-line banking, Internet banking,
ATMs, mobile phone banking and other modes of delivery have made it possible to
provide convenience to the customers while reducing the transaction costs to the
banks. Credit Cards, Debit Cards, Smart Cards etc. are a thriving and expanding
business in Pakistan. Once the RTGS is put in place the payment system in Pakistan
would enter a new phase of modernization.
(g) Competition among the banks has forced them to move away from the traditionallimited product range of credit to the government and the public sector enterprises,
trade financing, big name corporate loans, and credit to multinationals to an ever-
expanding menu of products and services. The borrower base of the banks has
expanded four fold in the last six years as the banks have diversified into agriculture,
SMEs, Consumers financing, mortgages, etc. The middle class that could not afford
to buy cars or apartments as they did not have the financial strength for cash
purchases are the biggest beneficiaries of these new products and services.
(h) Along with strong regulation, supervision and enforcement capacity of the StateBank of Pakistan a number of measures have been taken to put best corporate
governance practices in the banking system. Fit and proper criteria have been
prescribed for the Chief Executives, members of the Boards of Directors, and top
management positions. Accounting and audit standards have been brought to the
International Accounting Standards (IAS) and the International Audit Codes. External
audit firms are rated according to their performance and track record and those
falling short of the acceptable standards are debarred from auditing the banks.
These practices were put in place in Pakistan long before the scandals of Enercon,World Call and Pramalat had shaken the corporate world.
(i) The foreign exchange market that was highly regulated through a system of directexchange controls over suppliers and users of foreign exchange has been liberalized
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and all purchases and sales take place through an active and vibrant inter-bank
exchange market. All restrictions have been removed with full current account
convertibility and partial capital account convertibility. Foreign investors can now
bring in and take back their capital, remit profits, dividends and fees without any
prior removal and directly through their banks. Similarly, foreign portfolio investors
can also enter and exit the market at their own discretion.
The main lessons learnt from the last decade suggest that financial sector functions
effectively and efficiently only if the macroeconomics situation is favorable and stable. The
need to maintain macroeconomic stability will thus remain paramount in the years to come.
The agenda for further reforms in the financial sector is still quite formidable and the
challenges to spread the benefits of financial liberalization among the middle and low
income households and small and medium farms and enterprises are still enormous.
There are several areas of dissatisfaction with the banking sector that need to be addressed.
The most serious complaint against the banking system in Pakistan today is that the
depositors are not getting adequate return on their bank deposits. The difference between
the monthly weighted average rates of lending and deposits is taken as an indicator of the
spreads earned by the banks. It is true that these spreads have widened in the recent
months land this phenomenon has caused resentment among those whose only source of
income is their returns from bank deposits. But it is important to examine the facts and
their form judgments
The monthly comparisons are meaningless because PLS deposit rates are changed every six
months, while the lending rates are continuously adjusting because they are automatically
linked to T-bills or KIBOR rates.
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Banks in Pakistan
Pakistan currently has following types of banks
y Nationalized scheduled banksy Specialized banksy Commercial banksy Investment banksy Micro finance banksy Islamic banks
State Bank ofPakistan
The State Bank of Pakistan (SBP) is the central bank of Pakistan. While its constitution, as
originally laid down in the State Bank of Pakistan Order 1948, remained basically unchangeduntil January 1, 1974, when the bank was nationalized, the scope of its functions was
considerably enlarged. The State Bank of Pakistan Act 1956, with subsequent amendments,
forms the basis of its operations today. The headquarters are located in the financial capital of
Pakistan, Karachi with its second headquarters in the capital, Islamabad.
The State bank is headed by a governor and the current Governor of State Bank of Pakistan is
Mr. Shahid Hafiz Kardar.
History
Before independence on 14 August 1947, during British colonial regime the Reserve Bank of
India was the central bank for both India and Pakistan. On 30 December 1948 the British
Government's commission distributed the Reserve Bank of India's reserves between Pakistan
and India -30 percent (750 M gold) for Pakistan and 70 percent for India.
The losses incurred in the transition to independence were taken from Pakistan's share (a total
of 230 million). In May, 1948 Muhammad Ali Jinnah (Founder of Pakistan) took steps toestablish the State Bank of Pakistan immediately. These were implemented in June 1948, and
the State Bank of Pakistan commenced operation on July 1, 1948
Under the State Bank of Pakistan Order 1948, the state bank of Pakistan was charged with the
duty to "regulate the issue of bank notes and keeping of reserves with a view to securing
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monetary stability in Pakistan and generally to operate the currency and credit system of the
country to its advantage".
Major Functions
The State Bank of Pakistan performs both the traditional and developmental functions to
achieve macroeconomic goals. The traditional functions may be classified into two groups:
y The primary functions including issue of notes, regulation and supervision of thefinancial system, bankers bank, lender of the last resort, banker to Government, and
conduct of monetary policy.
y The secondary functions including the agency functions like management of public debt,management of foreign exchange, etc., and other functions like advising the
government on policy matters and maintaining close relationships with international
financial institutions.
The non-traditional or promotional functions, performed by the State Bank include
development of financial framework, institutionalization of savings and investment, provision of
training facilities to bankers, and provision of credit to priority sectors. The State Bank also has
been playing an active part in the process of islamization of the banking system.
The State Bank of Pakistan has also been entrusted with the responsibility to carry out
monetary and credit policy in accordance with Government targets for growth and inflation
with the recommendations of the Monetary and Fiscal Policies Co-ordination Board without
trying to effect the macroeconomic policy objectives.
The state bank also regulates the volume and the direction of flow of credit to different uses
and sectors, the state bank makes use of both direct and indirect instruments of monetary
management.
The views expressed by Bagehot in Lombard Street, (1873), about the Bank of England are all
applicable in the same manner to the State Bank of Pakistan. Just like the Bank of England of
the time State Bank holds all the power as all the credit system depends on it and subsequently
it has the power to make the country solvent or insolvent and so all the Banks depend on the
State Bank. As, if the state bank cannot make available the reserves of a bank, the bank wont
be able to pay its customer and hence the whole system could very well collapse.
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Standard Chartered Bank Limited
Standard Chartered Bank (Pakistan) Limited is Pakistan's oldest and largest foreign commercial
bank.Standard Chartered has been operating in Pakistan for over 140 years, with the chartered
Bank first opening an office in Karachi in 1863. Its estimated employs are over 9960 people in
its 162 branches throughout Pakistan.
History
The history of Standard Chartered in Pakistan dates back to 1863, when the Chartered Bank of
India, Australia and China first established its operations in Karachi. In 2006Standard Chartered
Bank acquired Pakistan's Union Bank. On 30 December 2006, Standard Chartered merged
Union Bank with its own subsidiary, Standard Chartered Bank (Pakistan), to create Pakistan's
sixth largest bank.
National Bank ofPakistan
National Bank of Pakistanmaintains its position as Pakistans premier Bank determined to set
higher standards of achievements. It is the major business partner for the Government of
Pakistan with special emphasis on fostering Pakistans economic growth through aggressive and
balanced lending policies, technologically oriented products and services offered.
It has redefined its role and has moved from a public sector organization into a modern
commercial bank. While it continues to act as trustee of public funds and as the agent to the
State Bank of Pakistan (in places where SBP does not have a presence) it has diversified its
business portfolio and is today a major lead player in the debt equity market, corporate
investment banking, retail and consumer banking, agricultural financing, treasury services and
is showing growing interest in promoting and developing the country's small and medium
enterprises and at the same time fulfilling its social responsibilities, NBP headquarters in
Karachi, Pakistan with over 1,200 branches country wide. The bank provides both commercial
and public sector banking services.
It has assets worth USD12.293 billion in 2007. Its subsidiaries include NBP Capital, NBP
Modaraba Management Company, NBP Exchange Company, Taurus Securities, NBP Almaty andothers.
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Habib Bank Limited
HBL commonly referred to as "HBL Pakistan" and head-quartered in Habib Bank Plaza, Karachi,
Pakistan, is the largest bank in Pakistan. The bank has a network of over 1450 branches in
Pakistan and 55 branches worldwide. It has a domestic market share of over 40%. It continues
to dominate the commercial banking sector with a major market share in inward foreignremittances (55%) and loans to small industries, traders and farmers.
It is one of the largest Bank of Pakistan having total total assets of RS. 434,931,930,000
Mission
To be recognized as the leading financial institution of Pakistan and a dynamic international
bank in the emerging markets, providing our customers with a premium set of innovative
products and services, and granting superior value to our stakeholders shareholders,customers and employees.
United Bank Limited
United Bank Limited (UBL) is one of the largest commercial banks in Pakistan having more than
1,000 branches inside the country. Its 15 branches outside the country are in the United States
of America, Qatar, UAE, Bahrain, and Republic of Yemen. It also has representative offices in
Tehran, Iran, and Almaty, Khazakstan. It owns subsidiaries in the UK (United National BankLimited), and in Zurich, Switzerland.
History
Agha Hasan Abedi founded the bank in 1959. In 1971 the Government of Pakistan nationalized
the bank. In 2002, the Government of Pakistan sold it in an open auction to a consortium of
Abu Dhabi Group and Bestway Group.
In 2002 the bank merged its operations in the UK with those belonging to National Bank of
Pakistan to form United National Bank Limited. United Bank owns 55% of the joint-venture and
National Bank of Pakistan owning the remainder.
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BankIslami Pakistan
BankIslami Pakistan Limited (BankIslami) is located in Karachi, Sindh, Pakistan. BankIslami
Pakistan received an Islamic commercial banking license from State Bank of Pakistan on March
31, 2005. It is the first financial institution in Pakistan that is going to focus on Wealth
Management as the core area of business. It intends to offer retail banking products,proprietary and third party product, and integrated financial planning services. The Bank
started its operations in the last quarter of year 2005.
Competition Situation
BankIslami is the Joint venture project of3 groups with 18.75% equity each, namely Jahangir
Siddiqui & Co. Pakistan, DCD Group UK, &Dubai Bank. Irrespective of stiff competition in the
market the Bank has successfully managed to grow over 400% during 2006 and all set to be a
100 Online Branch Network by the year end 2008.
The same was achieved by the existing largest player in the Islamic Banking Industry Meezan
Bank in 6 years time at December 2007. BankIslami has become a hallmark of innovation and
bringing new products and services in the market and by introducing the Bio-Metric ATM
facility it became the first bank of the region to offer such services and till date no bank has
been able to replicate this service. Bio-Metric identification (based on finger print) removes the
need for PIN based verification and it adds the security element in ATM transactions.
Image Marketing
BankIslami has been able to form a strong image of having authentic basis for its bankingoperations by using smart marketing ideas that resonate well with the public mind. For
example, the calligraphy of the bank's name in Urdu is claimed to have been done by the same
calligraphers who have done similar work in the Holy Mosque of Medina in Saudi Arabia.
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Credit rating
PACRA
Organization Date of
Dissemination
Long Term Short Term Outlook
Al Baraka Bank Ltd 10-JUN-10 A- A2 --
Allied Bank Ltd 08-JUN-10 AA A1+ Positive Outlook
Askari Bank Ltd 30-JUN-10 AA A1+ --
Atlas Bank Ltd 10-JUN-10 A- A2 --
Bank Al Habib Ltd 06-MAY-10 AA+ A1+ --
Bank Alfalah Ltd 24-JUN-10 AA A1+ --
Bank Islami Ltd 29-JUN-10 A A1 --
The Bank ofPunjab
30-JUN-10 AA- A1+ --
Bank of Khyber 30-JUN-10 BBB+ A2 --
Emirates Global
Islamic Bank Ltd
26-OCT-10 A- A2 Reaffims Rating
Watch
Faysal Bank Ltd 15-JUN-10 AA A1+ Rating Watch
First Women Bank
Ltd
21-JUL-10 BBB+ A2 Positive Outlook
Habib
Metropolitan Bank
Ltd
23-JUN-10 AA+ A1+ --
JS Bank Ltd 10-JUN-10 A A1 --KASB Bank Ltd 29-JUN-10 A- A2 --
MCB Bank Ltd 24-JUN-10 AA+ A1+ --
My Bank Ltd 08-JUL-09 A- A2 Negative Outlook
NIB Bank Ltd 22-JUN-10 AA- A1+ --
Royal Bank of
Scotland Ltd
09-JUL-10 AA A1+ Rating Watch
Soneri Bank Ltd 07-JUN-10 AA- A1+ --
Standard
Chartered Bank
Ltd
15-JUN-10 AAA A1+ --
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MOODYS
As of 21st, APRIL , 2011 Moody's Investors Service has downgraded by one notch the globallocal-currency (GLC) deposit ratings and standalone bank financial strength ratings (BFSRs) of
five Pakistani banks, that include Allied Bank, Habib Bank, MCB Bank, National Bank of Pakistan
and United Bank.
At the same time, the agency affirmed the foreign-currency deposit ratings assigned to these
banks at B3/Not Prime (stable outlook). The foreign-currency deposit ratings remain
constrained by Pakistan's B3 (stable outlook) country ceiling for foreign-currency deposits.
Moody's noted that the downgrades were primarily driven by the banks' growing exposure to
(B3 rated) Pakistan government securities and government-related lending, as a consequence
of limited private sector lending opportunities within the country's deteriorating
macroeconomic conditions.
Moody's estimated that as of end-June 2010, the rated Pakistani banks' total exposure to
sovereign-related risk assets had reached 38% of their total assets, from 24% in 2008,
representing a material exposure concentration and raising the banking system's susceptibility
to event risk at the B3 sovereign level.
While the financial fundamentals of Pakistani banks have shown relative resilience duringadverse conditions in previous years, their inability to curb their rising overall exposure to the
government sector highlights the limitations in depth and diversification of the country's
banking system.
Despite these growing challenges, Moodys believes that certain factors continue to support
Pakistani banks ratings being positioned at a higher level than the government rating. That
said, the decision to maintain the negative outlook on the banks standalone and long-term
local-currency deposit ratings reflects the Pakistani banking sectors still growing exposure
concentration to the sovereign and on-going vulnerability to macroeconomic deterioration,
which could negatively impact both the sovereign and the countrys banking system.
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Sectors performance:
Fuelled by a booming economy in the past few years, Pakistan was exposed to an abundance of
liquidity and increased investment which brought about unprecedented performance for all the
banks in the sector. Operating revenues soared, deposits and credit facilities increased and
investment portfolios generated phenomenal revenues, leading to an overall expansion of the
sector, until the economic crisis of 2008.
Results of Study conducted between 2000-2007 regarding efficiency of Banks
2000
During 2000, overall efficiency score of Pakistan banking sector showed some improvement.
The mean efficiency score in 2000 is 0.76 comparatively low to the world standard but good
recovery as compared to 19990.46. In this year, public sector banks achieved a technical
efficiency score of 0.90 as compared to private sector bank 0.75 and foreign sector banks 0.86.
In cost efficiency, private banks achieved 0.77, while public sector and foreign banks achieved
0.73 and 0.69 efficiency scores respectively. The difference between mean efficiency score of
allocative and cost is insignificant for public, private and foreign. There is a significant difference
in mean technical efficiency score among public, private and foreign owned banks. The Multiple
comparison tests show that there is a significant difference between mean technical efficiency
score ofpublic and foreign. In fact public banks perform better than the foreign banks in termof
technicalefficiency.
2001
In 2001, a declining trend was observed in term of overall efficiency score of Pakistanibanking
sector. In this year mean efficiency score of Pakistani banking sector was 0.68. Foreign
basedbanks have technical efficiency score in 2001 is 0.78, public owned banks 0.84 and private
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ownedbanks 0.76. In term of cost efficiency, private banks got a mean cost efficiency score
of0.50, publicbanks 0.71 and foreign banks 0.56. In this year the result of one way ANOVA tells
thatthe difference between mean efficiency score of technical and cost are insignificant
forpublic, privateand foreign banks while the difference between allocative mean efficiency
score is significant amongpublic, private and foreign owned banks. The multiple comparison
tests suggest thatthe difference between mean allocative efficiency score is significant
amongpublic, private andforeign banks. Public and private banks performed better than foreign
banks in term of allocativeefficiency.
2002
In 2002, the mean efficiency score of Pakistan banking sector is calculated as 0.80. Though it
is less than the world standard but in the context of 2001, this result shows some recovery
inbankingsector efficiency. Technical efficiency of private sector is observed at 0.93, 0.80 for
public and 0.80 forforeign sector banks. In term of cost efficiency, private sector has 0.87 score
while 0.64 and 0.69 forforeign and public sector banks respectively. The difference between
mean efficiencyscores of technical, allocative and cost is insignificant among public, private and
foreign banks.
2003
The results showed not much improvement in overall banking sector efficiency in 2003,
andmean efficiency is observed at 0.73. In term of technical efficiency, public sector
achievedhighestmean efficiency score 0.94 as compared to private 0.90 and foreign 0.67.
Whereas private bankingsector achieved mean cost efficiency score of 0.70 against public
sector bank 0.68 and foreign banks0.52. The difference between mean allocative efficiency
score is insignificant among allownerships, while there is a significant difference between meantechnical and cost efficiency scores ofpublic, private and foreign banks. Furthermore, public
banks performed better than theforeign banks in term of technical efficiency while in term of
cost efficiency private banks performedbetter than foreign banks.
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2004
In 2004, the mean efficiency score of Pakistani banking sector is 0.62. In this year
publicsectorbanks achieved technical efficiency score of 0.78 as compared to private banks 0.76
and foreignbanks 0.70. While mean score of cost efficiency of all three sectors are 0.44, 0.46
and 0.56 forforeign,private and public banks. There is no significant difference between mean
technical,allocative and cost efficiency score of public, private and foreign banks.
2005
The mean efficiency score of Pakistani banking sector in 2005 is 0.82. Private banking sectorhas
0.93 score of technical efficiency while public and foreign has same score of 0.84. In term
ofmeancost efficiency score of private banks are 0.78, public banks 0.71 and foreign banks 0.70.
It is also observed that there is no significant difference between mean technical, allocative and
costefficiency scores of public, private and foreign banks.
2006
In 2006, the mean efficiency score of Pakistani banking sector decline to 0.49. Public
sectorbanks have technical efficiency score of 0.91, private banks 0.79 and foreign banks 0.69.Themeancost efficiency score of public sector is 0.77, private banking sector 0.23 and foreign
banks 0.30. The one way ANOVA tells that there is no significant difference between
meanallocativeand cost efficiency of public, private and foreign banks while there is a
significant difference betweenmean technical efficiency scores of all ownership.It is further
observed that publicbanks performed better than the foreign banks in term of technical
efficiency.
2007
In 2007, the Pakistani banking sector efficiency improved a little as compared to 2006, butstill
at a very low level of 0.53 in comparison with world standards. The technical efficiency score
ofpublic sector is 0.94, private sector 0.73 and foreign sector 0.45. The mean cost efficiency
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scoreofpublic and private sectors remain at 0.37 and 0.40 respectively, while foreign banks at
0.32.There is no significant difference between mean allocative and cost efficiency scores of
public,foreign and private banks while there is a significant difference between mean
technicalefficiencyscore of public, private and foreign banks. The results also suggest that public
banksperformed significantly better than private and foreign banks in term of technical
efficiency.
Year wise Comparison of all Banks
Categories Efficiencies 2000 2001 2002 2003 2004 2005 2006 2007
Overall TE
AE
CE
0.80
0.82
0.65
0.78
0.68
0.57
0.85
0.82
0.73
0.82
0.75
0.63
0.75
0.63
0.47
0.88
0.83
0.74
0.79
0.36
0.31
0.72
0.48
0.38
Foreign
Banks
TE
AE
CE
0.73
0.85
0.61
0.78
0.66
0.56
0.80
0.75
0.64
0.67
0.73
0.52
0.70
0.63
0.44
0.84
0.82
0.70
0.69
0.40
0.30
0.45
0.50
0.32
Private
Banks
TE
AE
CE
0.83
0.92
0.76
0.76
0.65
0.50
0.93
0.91
0.87
0.90
0.77
0.70
0.76
0.61
0.46
0.93
0.84
0.78
0.79
0.27
0.23
0.73
0.50
0.40
Public
Banks
TE
AE
CE
0.90
0.68
0.61
0.84
0.83
0.71
0.80
0.83
0.69
0.94
0.71
0.68
0.78
0.72
0.56
0.84
0.82
0.71
0.91
0.78
0.77
0.94
0.38
0.37
Discussion
This study aims at investing the overall efficiency score of Pakistani banking sector over the
period of 2000-200. Here a comparison between publically owned, privately and foreign owned
banks over the period of 2000-2007. We use Data Envelopment Analysis and compute the
efficiency scores on yearly basis for every bank in the sample set. These efficiencies are furthercategorized as technical, allocative and cost efficiency scores.
As Pakistani banking sector has undergone phenomenal changes over the last two decades.
Financial reforms were introduced in early 1990s and liberalization and privatization also
became the part of these financial reforms in late 1990s. All these changes created a healthy
and competitive financial sector in the country. The regulatory authorities also played a vital
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role in establishing the financial sector by introducing the prudential regulations and strong
monitoring controls.
These financial reforms also changed the ownership structure of the banking sector. Earlier
banking sector was denominated by public owned banks and have the maximum market share.
By introducing the financial reforms and privatization policy, number of private banks emergedduring the last decade and market share of public banks declined significantly.
The results show an inconsistent performance of banking sector. In 2001 banking sector
efficiency scores was very low as compared to the world standard. The reason was obvious that
in the years Pakistani was suffering with high political and security instability. In comparison
with other banking sector, public banks performed significantly better in term of technology in
2000.
The study also conclude that due to high rate of mergers and acquisitions in banking sector
during 2006 and 2007, the performance of public sector banks become significantly different
from private and foreign banks in term of technical efficiency. The performance of private and
foreign banks is declined due to high rate of mergers and acquisition between private and
foreign banks. The number of private banks is increased significantly during that period, which
may cause their performance down in term of technical and cost efficiencies.
This study also recommends that these mergers and acquisition are not in the favor of banking
efficiencies. The policy of merger and acquisition may be reconsidered at this stage so that the
banking sector will improve their efficiencies in future.
This study owns certain limitations, inputs and outputs used in this study are quantitative, while
qualitative inputs are not considered due to the non-availability, like quality of services
provided by the different banking sectors and level of technological advancement could also
have been included in the analysis.
Overall study provide an insight of banking performance in term of technical, allocative and cost
efficiency over a decade. Even there is a massive growth in banking sector assets; it needs to
work hard to improve its efficiencies score. In the sample period, we indentify that private and
public banks are very close competitors in term of efficiencies score while foreign banks are far
behind. In general, public owned banks have better efficiencies score than its counterpart.
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Main Competitors for Banking Sector
y Post officesy Mutual fundy Share markety Insurancey Money lendersy Family and Friend
Challenges Ahead
y Improving profitabilityy Reinforcing technologyy Risk managementy Sharpening skillsy Greater customer orientationy Corporate governancey International standards
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Conclusion
The face of banking is changing rapidly. For a strong and resilient banking and financialsystem,
banks need to go beyond peripheral issues andtackle significant issues like improvements in
profitability,efficiency and technology, while achieving economies of scalethrough
consolidation and exploring available cost-effectivesolutions. These are some of the issues thatneed to be addressedif banks are to succeed, not just survive, in the ever changing
environment.
The banking system in Pakistan is significantly different from thatof other Asian nations because
of the countrys uniquegeographic, social, and economic characteristics. Pakistan has alarge
population, a diverse culture, and extremedisparities in income, which are marked among its
regions. Thecountrys economic policy framework combines socialistic andcapitalistic features
with a heavy bias towards public sectorinvestment.
Moreover banking industry must be transparent and accountable to their consumers. Media
should play an important role in this.If they will take serious actions most probably the growth
in the evolution of banking industry will be more than now.
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Bibliography
y International Research Journal of Finance and Economicsy The Journal of Finance by John H. Wood
References
y www.wikipedia.comy Abdul, Q. and Khan, S. (2006). X-efficiency, scale economies, Technological Progress and
Competition of Pakistanis banks, Pakistan Institute of Development Economics,
http://mpra.ub.uni-muenchen.de/2654 MPRA Paper No. 2654
y www.thenews.com.pky www.sbp.org.pky www.pacra.comy www.eurojournals.com