Commercial banking made tremendous progress and phenomenal growth since independence. By December 31, 1973 there were 14 scheduled Pakistani commercial
Chapter 3
71
banks with 3,323 offices in Pakistan and 74 offices in the foreign countries (Meenai, 2010). These scheduled commercial banks were:
1. National Bank of Pakistan 2. Habib Bank Limited
3. Habib Bank (Overseas) Limited 4. United Bank limited
5. Muslim Commercial Bank Limited 6. Commercial Bank Limited
7. Standard Bank Limited 8. Australasia Bank Limited 9. Bank of Bahawalpur Limited 10. Premier Bank Limited 11. Pak Bank Limited 12. Sarhad Bank Limited
13. Lahore Commercial Bank Limited
14. Punjab Provincial Co-operative Bank Limited
All commercial banks played a vital role in mobilizing people‟s savings to provide financing to individuals and corporate sector of the economy. However, it was realised that these banks failed to mobilize savings to the sectors catering goods and services needs of the large number of people in the economy. Moreover, SBP was concerned about the concentration of credit in small class of big borrowers. A report issued by the SBP in 1970, revealed that only eighty eight account holders in banks had access to 25% of the total credit expanded by banks and majority of these account holders were the directors of banks themselves. Given the role of private sector in the industry and banking, SBP was not legally empowered to change the ownership structure of
Chapter 3
72
commercial banks. Of the four largest banks of that time, only one bank was in the public sector while the rest of the three were in the private ownership of three big families such as Habib, Adamjees and Saigols. These four banks hold 75% share of the total deposits and two third of the total earning assets. There were 4 other private banks which were also owned by four big families such as Dawood, Sheikhs, Haji Habib and Fancys. All seven private banks owned by big business families, altogether account for 92% of deposits held by all the local banks. Therefore, it was also not a surprising fact that these family owned banks promoted their own companies in the provision of credit. In the light of this background and other contemporary issues, banking reforms were introduced in 1972 (Zaidi, 2005). The Banking Reforms Ordinance 1973, was promulgated to correct the situation but some political circles believed that the existing anomalies and injustices could not be removed through this legislation. Therefore, Government of Pakistan nationalized all the banks in 1974 under the Banks Nationalization Act, 1974. The main objectives of this nationalization were to reduce the concentration of credit in the hands of few rich bankers by enabling government to use that capital for economic development of the country and to make credit availability to high priority sectors of the economy. Under the Nationalization Act, Pakistan Banking Council notified Banking Amalgamation Scheme 1974, which directed smaller banks to amalgamate with bigger banks to form the following five big national banks in three phases:
1. National Bank of Pakistan 2. Habib Bank Limited
3. Muslim Commercial Bank Limited 4. United Bank Limited
Chapter 3
73
The first phase was completed on June 30, 1974 when Habib Bank (Overseas) Limited was merged with Habib Bank Limited, Premier Bank Limited with Muslim Commercial Bank Limited, Bank of Bahawalpur Limited with National Bank of Pakistan, and Australasia Bank Limited was merged with Pak Bank Limited, Lahore Commercial Bank Limited and Sarhad Bank Limited to form Allied Bank of Pakistan Limited. The second phase was completed on December 31, 1974 with the merger of Commercial Bank Limited and United Bank Limited (Zaidi, 2005). The last phase was completed on June 30, 1975 when Standard Bank Limited and Habib Bank Limited merged together (Siddiqi, 2007). In this way, all the private banks were completely wiped away from the financial structure of Pakistan.
After nationalization, banks were ordered to open their branches in every township of the country having a population of 2,000 inhabitants. This step played a positive role in shifting a non-monetized economy into a more formal banking economy, but its major drawback was observed in the form of overcrowded and overstaffed branches. Even branches of national banks were located next to each other in some localities regardless of their deposit potential. Moreover, the government ownership of commercial banks contaminated the credit allocation and loan recovery process with the political intervention besides other inefficiencies. Consequently, non-performing loans (NPLs) increased sharply, quality of financial services deteriorated and financial sector suffered losses. Although, some of the socio-economic objectives of nationalization were met but the powerful and lucrative banking sector was now open to political pressure and misuse (Zaidi, 2005).
Another development of this period was the introduction of the interest free banking in the form of Islamic banking in February 1979. Islamic banking was originally started by eliminating interest from NBFIs such as House Building Finance Corporation,
Chapter 3
74
National Investment Trust (NIT) and mutual funds of the Investment Corporation of Pakistan (ICP). Few months later, government ordered the nationalized commercial banks to provide interest free loans to the small farmers to meet their seasonal agricultural financial needs. In the next one year, this scheme was expanded to fishermen and co-operatives societies. All the five nationalized commercial banks set up their non-interest based profit and loss sharing deposit accounts in 1981 that replaced the interest bearing deposit accounts completely by 1985.