BANKING LAW

Nationalizatio n Act 1974

ACKNOWLEDGEMENT

We pay our gratitude to the Almighty for enabling us to complete this assignment within due course of time. We are also grateful to our respected Teacher, for extending her cooperation to us right through this project & providing us with her wisdom whenever required. He has been a continuous source of inspiration throughout the assignment. We are also thankful to our parents and friends for always being there whenever we need their support and guidance.

Table of Contents
NATIONALIATION ........................................................................................................................................................ 1 NATIONALIZATION ACT 1974 ................................................................................................................................. 2 NATIONALIZATION OF BANKS .............................................................................................................................. 3 OBJECTIVES ................................................................................................................................................................ 3 NATIONALIZED BANKS ......................................................................................................................................... 4 CAUSES OF NATIONALIZATION OF BANKS ................................................................................................ 4 EFFECTS OF NATIONALIZATION .......................................................................................................................... 6 HIGHLIGHTS OF NATIONALIZATION ACT 1974 ............................................................................................. 7 PRIVATIZATION OF BANKS IN PAKISTAN ........................................................................................................ 7 PRIVATIZATION ........................................................................................................................................................ 7 CONCLUSION ................................................................................................................................................................. 8

Nationalization Act 1974

NATIONALIATION
Nationalization is the process of taking a private industry or private assets into public ownership by a national government or state. Nationalization usually refers to private assets, but may also mean assets owned by lower levels of government, such as municipalities, being transferred to the public sector to be operated and owned by the state. The opposite of nationalization is usually privatization or de-nationalization, but may also be municipalization. Industries that are usually subject to nationalization include transport, communications, energy, banking and natural resources, though there are other areas and there have even been calls for the nationalization of the legal service.

Nationalization Act 1974

NATIONALIZATION ACT 1974

An Act to provide for the Nationalization of banking business in Pakistan. The Act of Parliament received the assent of the President on the 7th March, 1974, and is hereby published for general information. Whereas it is expedient in the public interest to provide for the nationalization of banking business in Pakistan. The Government of Pakistan nationalized all the Pakistani banks on June, 1974. The ownership, management and control of these banks stood transferred to and vested in the Federal Government. The shareholders were compensated by 15 years Federal Government bonds. By December 31, 1973, there were 14 scheduled Pakistani commercial banks with 3323 offices all over the country and 74 offices in foreign countries. Inspire of this tremendous growth and development of commercial banks and their prominent role of financing in the countrys economy, it was felt that these banks failed to ensure that the resources flow in those sectors of economy where they would produces goods and services needed badly by a very large number of people in Pakistan. Therefore the nationalization of banks was considered necessary. On January 01, 1974, Pakistani Banks were nationalized under the bank (Nationalization) Act, 1974, with following objectives. 1. To provide the fair distribution of credit. All the sector of economy will enjoy the credit facility. 2. To encourage and stimulate the effective nationalization of savings in the country. 3. To provide social justice in the country by proper allocation of credit and financial resources to different classes of the society. 4. To enable the Government to use the capital concentrated in the hands of a few rich bankers for the repaid economic development of the country and the more urgent social welfare projects. 5. To co-ordinate the banking policy in various areas of feasible joint activity without eliminating healthy competition among banks. According to section 5 of this Act the State Bank of Pakistan; Industrial Development Bank of Pakistan, The Punjab Provincial Cooperative Bank and all commercial banks incorporated in Pakistan and carrying banking business in Pakistan or abroad have been nationalized and the number was brought down to five.

Nationalization Act 1974

NATIONALIZATION OF BANKS
The Government of Pakistan nationalized all the Pakistani banks on June, 1974. The ownership, management and control of these banks stood transferred to and vested in the Federal Government. The shareholders were compensated by 15 years Federal Government bonds. By December 31, 1973, there were 14 scheduled Pakistani commercial banks with 3323 offices all over the country and 74 offices in foreign countries. Inspire of this tremendous growth and development of commercial banks and their prominent role of financing in the countrys economy, it was felt that these banks failed to ensure that the resources flow in those sectors of economy where they would produces goods and services needed badly by a very large number of people in Pakistan. Therefore the nationalization of banks was considered necessary. OBJECTIVES

On January 01, 1974, Pakistani Banks were nationalized under the bank (Nationalization) Act, 1974, with following objectives. 1. To provide the fair distribution of credit. All the sector of economy will enjoy the credit facility. 2. To encourage and stimulate the effective nationalization of savings in the country. 3. To provide social justice in the country by proper allocation of credit and financial resources to different classes of the society. 4. To enable the Government to use the capital concentrated in the hands of a few rich bankers for the repaid economic development of the country and the more urgent social welfare projects. 5. To co-ordinate the banking policy in various areas of feasible joint activity without eliminating healthy competition among banks. According to section 5 of this Act the State Bank of Pakistan; Industrial Development Bank of Pakistan, The Punjab Provincial Cooperative Bank and all commercial banks incorporated in Pakistan and carrying banking business in Pakistan or abroad have been nationalized and the number was brought down to five.
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Nationalization Act 1974

NATIONALIZED BANKS Following are the Nationalized Banks in Pakistan. National Bank of Pakistan Bank of Khyber Bank of Punjab Sindh Bank First Women Bank Limited

CAUSES OF NATIONALIZATION OF BANKS Although Commercial Banks in Pakistan were playing their role in the economy developing of the country, yet they were nationalized on 1st January 1974. Following were the main causes of the Nationalization. Concentration of Wealth of Few Hands: Commercial banks in Pakistan were owned by big businessmen and landlords and they were holding key positions in these banks. They had taken heavy loans in their names and in the name of their close relatives. In this way they had accumulated big capital assets for themselves to earn enormous amounts of profits. According to an estimate only 200 families had taken 75% of the total credit advanced by banks in 1972, very small industrialists and Artisans were largely deprived of the credit facilities. With the result that national wealth concentrated in few hands and the poor were becoming poorer. Inappropriate Use of Credits: Commercial banks gave loans to those persons who were in the position to make repayments of these loans. There were little bothered about the usage of these loans. Thus, these loans were mostly taken by influential businessmen for use in black marketing, hoarding and speculative activities. These loans could have been used for developing of agriculture and industrial sectors of our economy. Therefore, the inappropriate use of credits resulted in slow growth of the economy. Unbalanced Distribution of Credit: There was no clear cut policy for the distribution of credit between different sectors of the economy due to which Agriculture, the most important sector of the economy, was largely neglected. According to an estimate only 10% of the total credit was advanced for use in the sector of Agriculture, so this sector remained underdeveloped. However, speculative activities in trade and commerce flourished because 40% of the total credit was advanced to this sector. In this way, the distribution of credits was advanced to this sector. In this way, the distribution of credit was unbalanced due to which the growth of our economy was also unbalanced.

Nationalization Act 1974

Protection of Black Money: Private Banks protected black money of the people in their accounts because even government was not legally allowed to know about the deposit figures of these banks. Therefore, Government officers and the Entrepreneurs deposited in these banks the amount of money which they obtain in bribery on by black marketing hording. Moreover, they also obtained facilities from these banks to multiply their wealth. Unhealthy Competition among Banks: Private Banks competed with each other vigorously. In order to improve their efficiency they spent a lot of money on advertisements. According to an estimate, their advertisement expenditures at that time were more than Rs. 25 million. Banks opened branches in competition with each other at particular places; therefore, concentration of any branches at a place led to wastage of the resources. On the other hand, no bank was ready to open its branches in rural areas. Sometimes they offered bribes to receive big deposits form Government and Semi Government Corporations. This unhealthy trend on the part of banks was undesirable. Exploitation of Bank Employees: Commercial Banks exploited their employees in different ways. For example, only those persons were given jobs in the banks they were able to bring heavy deposits to them. Moreover, bank employees were promoted on the basis of deposits and caliber hard work and efficiency were not considered as a basic for promotion. Low Efficiency Of Foreign Bank Branches: A few Pakistani banks had opened their branches in foreign countries. The working efficiencies of these branches were substandard and most of them were running in losses. In spite of that, branches were not closed. Infect they were a source of foreign trips for high banks offices. Ineffective Monitory Policy of the State Bank: Although commercial Banks were working under the State Bank of Pakistan as scheduled banks, yet they did not cooperate with the State Banks in the implementation of its Monitory Policy. They never bothered about the proportion of margin requirement in advancing loans and also cared little about their own liquidity ratio in the determination to control the money supply by its Monitory Policy. Due to the above reasons, Government of Pakistan nationalized all the Pakistani Commercial Banks in the country.

Nationalization Act 1974

EFFECTS OF NATIONALIZATION
Although Nationalization of Banks had brought many advantages to the people, the bankers and the economy as a whole, yet there appeared some serious disadvantages of Nationalization of Banks these included High Intermediations cost Poor Management / with narrow product ranges Poor loan recovery from the customer Piling up f NPLs (Non performing loans) mostly these loans were given on political grounds rendering low profitability to the banks. Thus again the need of the time was to deregulate of the financial sector and Privatize the banks in the National interest A total of 24 commercial banks (7 domestic / 17 foreign) were doing business in Pakistan started in 1990. The Deregulation and Privatization started in 1991 with two of the publicly owned banks, MCB and ABL. They were successfully privatized. At the same time permission was granted for private sector. 10 new Banks got license to commence their business operations in 1991. Availability of funds to the government for meeting its social sector targets Equitable distribution of credit to the different sectors, industries and regions. Centrally coordinated policy frame work Excessive government control leading to the decisions on non professional considerations. Lack of fair market competition leading to absence of availability of innovative and diversified products to the customers. Neglect of personalized services to the customers. Mismanagement leading to alarming size of nonperforming loans portfolio.

Nationalization Act 1974

HIGHLIGHTS OF NATIONALIZATION ACT 1974

(1) Every person holding office in any bank as Chairman, Director or Chief Executive by whatever name called, other than a person who holds such office by virtue of his appointment or nomination by the Federal Government or the State Bank, shall stand removed from his office on the commencing day and his removal shall not entitle him to any compensation and no such claim shall be entertained by any Court, Tribunal or other Authority. (2) The vacation of his office by a Chairman, Director or Chief Executive under sub-section (1) or otherwise shall not in any way absolve him of his liability, if any, under any law, contract or otherwise however subsisting immediately before the commencing day or the day in which he ceases to hold such office. (3) A Chairman, Director or Chief Executive by whatever name called ceasing to hold office under any of the aforesaid provisions shall entrust or cause to be entrusted to the person succeeding him in that office, intact and in as good order as they existed on the day immediately preceding the commencing day all properties, all books of accounts and other records and documents belonging to or in the custody or control or pertaining to the affairs, of the bank. (4) Central Boards of the banks mentioned in the Schedule, and all local bodies, area boards, managing committees, executive committees, and similar other bodies for the management or any bank shall stand dissolve and all member of such bodies shall stand removed from office, on the commencing day.

PRIVATIZATION OF BANKS IN PAKISTAN PRIVATIZATION

Privatization implies reducing government intervention in the economy by allowing more and more private ownership of industry and enterprises. The specific goals of Privatization Banking sector were; Improved regulation Proceeds from privatization to be used to retire expensive debt Ensuring the quality of services Broaden and deepen the capital market Lower transaction cost Strengthen Public Finances

Nationalization Act 1974

CONCLUSION
Nationalization Act is an important part of our statutory history. We have, at length discussed objectives merits and grey areas of nationalization. At present the world is heading forward with the notions of disinvestment, privatization and free market and banking industry is no exception to it. At present banking industry is passing through this phase and visibly performing well. 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.