A critical analysis of banking sector reforms in Pakistan for the period 1990-2002

Abstract

During the past ten or twelve years, the Pakistani banking system has undergone what can only be classified as a complete U - turn. From a banking sector dominated by five major state owned banks at the end of the 1980's, lending without any proper procedures to borrowers more likely than not to default on their loans; to a more responsible but seriously weakened banking sector where international standards for disclosure and transparency govern every move by a bank, from appointment of CEOs to the disbursement of even a personal loan. The banking sector has come a long way. There are no longer five major Nationalized Commercial Banks (namely MCB, ABL, UBL, HBL and NBP) working to their own tune, dispensing loans as politically motivated favors, with impunity. Out of the big five there are only two major Nationalized Commercial Banks left and even their existence in their present form is uncertain over the very near future. The major change agent that has made possible financial liberalization, recovery of defaulted loans, the setting up of stringent prudential regulations, the revamping of the SBP as a governing body and the privatization of banks have been banking sector reforms both those initiated by the Government of Pakistan (the home grown reforms) and the reforms introduced by the World Bank. 11 These reforms (five in number) have transformed the face of the Pakistani banking sector from one where 'anything goes' was the motto, to one where a proper set of procedures and regulations govern banking activities. From technical up gradation of the Central Bank to restructuring of the state owned banks and their sale, these reforms have touched almost every sphere of the banking system and have left in their wake, a streamlined, efficient and proactive banking system capable of coping with both the external and internal challenges facing the country today. They have not been without their costs however and the reforms have not always been easy to implement and have not always been entirely implemented. The reasons for this have been many, from political interference to non-viability of reforms and wherever possible these reasons have been examined.