Nationalization and Privatization Of Banks in Pakistan

The banking reforms turned to be transitional and interim step and when they were hardly eighteen months old the government nationalized the banking systems, with the following main objectives. y To enable the government to use the capital concentrated in the hands of a few rich bankers for the rapid economic development of the country and the more urgent social welfare objectives. y y To distribute equitably credit too different classes sectors and regions. To coordinate the banking policies in various area of feasible joint activity without eliminating healthy competition among banks. The act passed for the nationalization of banks is known as the banks Nationalization Act 1974. Thus under this act the state bank of Pakistan and all the commercial banks incorporated in Pakistan and carrying business in or outside the country were brought under government ownership with effect from Jan 1, 1974. The ownership, management and control of all Pakistani banks stood transferred to and vested in the Federal government. The shareholders were provided compensation in the form of federal government bonds redeemable at par anytime within the period of fifteen years. Under the Nationalization act, the Chairman, Directors and Executives of various banks, other than those appointed by federal government were removed from their offices and the central boards of the banks and all local bodies were dissolved. Pakistan banking council was established to coordinate the activities of the Nationalized Commercial banks. At the time of Nationalization on December31, 1973 there were following 14 Pakistani commercial banks with 3323 offices allover Pakistan and 74 offices in foreign countries:-

National banks of Pakistan Habib bank limited 1

Habib bank (overseas) limited United bank limited Muslim commercial bank limited Commerce bank limited Standard bank limited Australia bank limited Bank of Bahawalpur limited Premium bank limited Pak Bank limited Sarhad bank limited Lahore commercial limited Punjab provincial co-operative bank limited The Pakistan banking council prepared a scheme for the recognition of banks. The bank scheme 1974 was notified in April, providing for the amalgamation of the smaller banks with bigger ones and following the five units in three phases: National bank limited Habib bank limited United bank limited Muslim commercial bank limited Allied bank of Pakistan limited The nationalization was very smooth and gave very positive results.

What Were The Causes Of Nationalization Of Banks In Pakistan?

Following were the main causes of Nationalization. The banks were nationalized to provide the fair distribution of Credit. All the classes of the public will enjoy the credit facility. There was a completer hold of few capitalists over the public savings. Now after nationalization their monopoly finished. Before the nationalization the Agriculture sector was ignored but now after nationalization proper importance is given to this sector. Now output of this section is increasing day by day. It was also stated that credit needs of the small businessmen can be met if 2

the banks are in the public sector. Before nationalization, there was only profit motive for the banker and service motive was ignored. So it was necessary that banks should be nationalized. It was claimed that nationalization of banks will encourage and stimulate mobilization of savings in the country. When the credit facilities will be provided to the underdeveloped areas, the marginal rate of capital return can increase. But it was possible only if the banks were nationalized. It was also claimed that State Bank can minimize the fluctuation in the economic activity with the help of nationalized Commercial Banks. So price stability can be provided by not issuing credit for the hoarding and smuggling. The banks were also Nationalizes on this ground that public will feel more security in depositing the money in nationalized banks.

Privatization of National Banks:Meaning of Privatization:

Privatization is the general process of involving, the private sector in the ownership or operation of a state owned enterprise. Privatization includes the following three sets of measures. (i) Transferring ownership of public enterprises either fully or partially to private enterprises. (ii) Injecting the spirit of commercialization in public sector enterprises through the grant of autonomy in decision making provision of incentives for workers etc. (iii) Contracting and the public enterprises for a certain period of private enterprises.

Why privatization of banks?

The Government of Pakistan is not at all satisfied with the performance of nationalized banks. The areas which are severely criticized are the falling standard of banking service. The complaint about the services like delay in home remittances, dispatch of cheques, drafts, inefficient counter services overstaffing bad debts militant unionism of the banks, number of bad debts, etc., are on the increase. The Government, therefore, decided to privatize the banks. A Privatization Commission was set up on January 22, 1991. The Commission has transferred two banks namely MCB and ABL to the private sector.

New Banks in the Private Sector:The government approved and permitted the establishment of 15 new private banks. 3

Banking Sector:Privatization is expected to lead to a sounder and more efficient banking system with the capacity to mobilize savings and allocate them to the most economically productive uses. Private banks facing competition are likely to more closely respond to customer needs, improving the quality of services and introducing needed new financial products.     National Bank Of Pakistan: Divestment of 13.2% shares of National Bank of Pakistan for Rs. 1.386 billion. Bank Al-Falah: Divestment of 30% shares of Bank Al-Falah for Rs. 620 million. Habib Bank Limited: Sale of 51% of GOP stake in HBL for Rs. 22.409 billion. United Bank Limited: Sale of 4.22% shares of UBL through Capital Market for Rs. 1.040 billion.

Privatization of Banks: In the last fifteen years privatization has become a central element of the structural reform agenda in developed and developing countries alike. Indeed, it is now quite difficult to find a country that has not embarked on a program to divest some or all of its state-owned enterprises (SOEs) or to involve the private sector in their management, ownership, and financing. During the past 15 years, over 250 commercial banks have been fully or partially privatized by governments of 59 countries either publicly through a public offerings of shares, or privately through an asset sales. Privatization of Banking Sector in Pakistan: Inancial sector significantly altered in early 1970s with nationalization of domestic banks under the Banks Nationalization Act 1974. The Pakistan Banking Council was set up to act as holding company of nationalized commercial banks and to exercise supervisory control over them. By end of 1980s, the pre-dominance of public sector in banking and non-bank financial institutions together with instruments of direct monetary control was contributing to financial repression, financial sector inefficiency, crowing out of private sector and deteriorating quality of assets. State Bank of Pakistan role as a central bank had been considerably weakened due to presence of Pakistan Banking Council. Duplication of supervisory role was diluting SBPs enforcement of regulations over nationalized commercial banks. At the onset of 90s, the Banking Sector in Pakistan was dominated by the public sector banks, which were characterized by: High intermediation Costs Over-staffing and over-branching

 Huge portfolio of non performing loans Poor Customer Services Undercapitalized Poorly Managed/Narrow product range Averse to lending to SMEs/ Housing and other segments
Undue interference in Lending, Loan recovery and personnel issues.

Objective of Privatization of Banks in Pakistan:The objectives of privatization of banks can be achieved if the following principles are adopted for privatization process in Pakistan: Privatization should be viewed as good governance reforms. Privatization program must be an integral part of a countrys economic policy. Privatization program must include a strong institutional and regulatory framework. The environment must be competitive, regulated and transparent. Deregulation of the financial system should precede privatization. Regulation is required only where restructuring unable to ensure a fully competitive industry. Rehabilitation prior to privatization should be avoided. Privatization programs should be accompanied by extensive public awareness campaigns. Privatization programs should be complemented by comprehensive social welfare programs. 5